Market downturns are always good to spot the next leaders. The market downturn of 2016 is no different. Now there are additional data points showing that FacebookFB, -1.59% may be the next Apple AAPL, -2.26% No, Facebook will not start making phones. No, Facebook will not have a low P/E like Apple. I am talking about stock performance like Apple of yesteryear.
Five stages
According to ZYX Change Method, there are five stages of a long trade based on change. The annotated diagram shows that Facebook is early in stage three. This is where roughly Apple was in 2011. Subsequent to 2011, Apple stock showed large gains. The same expectation is now for Facebook. The diagram also shows Apple is now in the fifth stage.
Relative strength in 2016
Facebook has shown relative strength in the year 2016. As the annotated chart shows, Facebook has outperformed S&P 500 Index as represented by the SPDR S&P 500 ETF Trust SPY, -1.26% by 6.47% at the time of this writing.
In contrast, Apple has underperformed the same index by 2.45% at the time of this writing.
Relative strength since the market top
As the annotated chart shows, Facebook has outperformed the S&P 500 by 15.51% since the market top. In contrast, Apple has underperformed the S&P 500 by 17.26%. In other words, Facebook has outperformed Apple by 32.76%.
High-beta expensive stocks
Facebook is a high-beta expensive stock in terms of trailing P/E. High beta means the stock typically moves more than the market.
In this market downturn, high-beta expensive stocks have been especially hard hit. The fact that Facebook has outperformed the market in such an environment is remarkable and bodes well for the things to come. Just take a look at two other social media stocks, LinkedIn LNKD, -0.38% and Twitter TWTR, +0.00% ; both of these stocks have been cut in about half.
Fundamentals
With a trailing P/E of 80.87, Facebook is a very expensive stock. Compare this with a trailing P/E of 10.22 for Apple. However, the picture changes dramatically when one looks forward. The five-year expected PEG ratio for Facebook is only 1.03. In contrast, PEG Ratio for Apple is 0.89.
To be successful, investors must look forward. Making decisions mostly looking through the rear-view mirror typically does not pay off. From the numbers in the above paragraph, it is obvious that although Facebook is extremely expensive compared to Apple looking in the rear-view mirror, looking forward five years, Facebook starts falling more in line with Apple.
The future of Apple
Apple is still worth holding because there is a lot of potential options coming out of its future products and services. It may be that Apple Pay becomes very successful. It may be that Apple car takes off. While waiting, Apple has become a good value stock with a rock solid balance sheet and a good dividend.
Based on a false premise, I have been criticized for my positive calls on Facebook;please see U.S. News & World Report for an example. The purpose of buying stocks is not that they are cheap or expensive; the purpose is to make money. The false premise is that stocks with high P/E do not make money for investors. Our Facebook position is long from $49.92. Facebook is trading at $105.72 as of this writing. Partial profits have been realized on this position.
Our Apple trades have been well documented on MarketWatch, some of the trades are shown on the chart in the article titled “Look beyond ‘the watch’ for what will drive Apple.” Our Apple position is long from $18.71. It is trading at $96.60 as of this writing. Significant profits have already been realized on this position.
Why hold both Apple and Facebook
At The Arora Report, we advocate diversification by strategies. Facebook and Apple represent two very different strategies. In our models, Facebook represents a high-growth mega cap with potential to provide high risk-adjusted return. Apple is a value stock with good dividend and plenty of options on future products.
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