Stock Ideas - Long Google / Short Apple

Google's relative performance over Apple is approaching multi-year lows

GOOGL US Equity | 20221231 @ US$88.23

Technical Analysis

Google is about to fall through a key LT support level, which is about US$83. After that, the share price is likely to trend down to US$71-72 level, before potentially bear-rally to US$80.

From US$83 to US$72, the downside is about 13% while from US$72 to US$80, the upside is about 11%, leading to a round-trip return potential of 24%+.

Given that it broke through the long-term uptrend from Apr 2020 and came back down since Apr 2022 for two years, technically it could fall through the long-term support for at least one year. This downside overshoot is to compensate for the upside overshoot.

Relative Valuation Analysis

However, the above technical analysis should be paired with its historical valuation (using actual PE), which now stands at about its lowest level since GFC at 17X. This indicates that the current share price offers a good opportunity to build a LT position.

There are two key reasons for the share price correction in 2022, namely, lower multiple with terminal yields going up and EPS being revised down over the year. FY2022 EPS is expected to show the first yoy decline in the past 10 years, partially due to the massive growth seen in FY2021. However, the growth is expected to resume from FY2023 based on the current consensus numbers.

Conclusion

Technical and relative value analysis currently do not agree with each other as the former indicates Short while latter Long. One way to reconcile the difference is timing mismatch.

Over the next 6-12 months, technical analysis could prevail, meaning the share price could overshoot on the downside; meanwhile over the longer term, the relative valuation signaling Long could prove correct.

Therefore, given the overall macro headwind (economic recession in the US) and possibilities of further EPS downgrade, Google is likely a near-term short candidate from a downside overshoot and/or earnings downgrade. After that, a long position should be considered when a decent margin of safety is established.

AAPL US Equity | 20221231 @ US$129.93

Technical Analysis

Apple has recently fell through the support level @ about US$131-132, established since beginning of 2019. It is likely to drift down further to US$110 level, before bear-rallying back to US$125. However, it is likely to remain in a downward drifting mode for the next 6-12 months. The next key LT support level is US$85-90.

From US$130 to US$110, the downside is 15% while from US$110 to US$125, the upside is about 13.5%, leading to a round-trip return potential of 28%+.

Apple has been trading on the upper range of its historical corridor since Jun 2020, which broke down in Dec 2022. Therefore, it is likely that it should trade in the lower range of the trading corridor in the next 6-12 months.

Relative Valuation Analysis

Unlike Google, Apple’s relative valuation analysis also indicates further downside in 2023 as its PE has been well above its peak level of about 22X since the start of Covid-19. This temporary period of high valuation was likely driven by tailwind from the low-rate environment, thus higher multiple as well as retail capital chasing the name.

However, looking forward, multiple should trend lower as terminal yields remain high, and earnings get revised down (FY2023 consensus has only been revised down by 4.87% at the time of writing). Going from the current PER of 21X to a long-term average of 15X indicates potential downside of 28.5%, which gives a price of US$92.8. this seems to line up perfectly with the above technical analysis and the timing is likely to be 2023Q3.

Conclusion

Both technical and relative valuation analysis indicate further share price downside for Apple, which has be a relative outperformer in 2022.

Therefore, Apple is considered as a safe and easy short candidate for 2023 with decent margin of safety.

As a L/S pair, Long Google and Short Apple seems to be a good strategy.

Disclaimer: this note is meant for a record of personal thoughts on stock investments and does not constitute any advise / recommendations to any person/organisation.