Investors Ignore Coronavirus & Bid Up Apple On Its Great Report

Stocks Rebound Despite Coronavirus Fears

The stock market rebounded on Tuesday after its sharp decline on Monday related to the coronavirus. Even though it doesn’t seem like the increase in cases has slowed, markets looked past this issue. It makes you wonder if the virus was just an excuse to sell stocks because they were running hot.

There are 5,572 confirmed case, 131 fatal cases, and 1,109 people in serious condition. Starbucks has temporarily closed more than half of its Chinese stores (over 2,000). Tis illness is unlikely to make a large impact on America (its less significant than the flu). But it will hurt Chinese economic activity in Q1. 

It will be very interesting to see how the Shanghai Composite index opens after China’s New Year holiday ends. Based on the recent decline in airline stocks and the 1.36% rise in the JETS ETF on Tuesday, I wouldn’t be surprised if Chinese stocks open lower and then rebound either in the next few hours or the next few days.

Details Of Tuesday’s Action

This was a reversal of Monday’s selloff. No one never expected this virus to cause a significant decline. Stock investors should be more concerned with valuations than a temporary negative impact on Chinese growth. Specifically, the S&P 500 rallied 1.01%, the Nasdaq rose 1.43%, and the Russell 2000 rose 0.86%. 

VIX fell 1.95 to 16.28. This bout of volatility in markets may not be over, but it's unlikley the coronavirus will be the cause of future declines. In charts that show when the WHO has announced global health emergencies, it has been in tune with a bottom in stocks. However, if that never happens, the bottom related the coronavirus may be in.

Every sector was up on Tuesday. Biggest rises were in tech and communication services which were up 1.87% and 1.18%. Apple’s 2.83% rally before its earnings report helped tech. IHF health insurance ETF was up 1.54% despite Bernie’s high odds of winning the nomination. He now has a 41% chance of winning which is 7 points higher than Biden. 

Good news for healthcare stocks, and possibly the whole market is that President Trump’s approval rating is at a 1st term high. An average of 51.8% disapprove of Trump and 45.3% approve. That increases his odds of beating the Democrat. 

The 2 Democrat primary polls on Tuesday showed Biden with a 5 point lead nationally and Sanders with a 6 point lead in California. Biden was 3rd in California. Warren was in 2nd. If she drops out before that election, Bernie can gain a lot of delegates in the state.

10 year yield rose 5 basis points to 1.65% which was a reversal of Monday’s decline. It would be surprising if it hit a new record low this year given the cyclical upturn. 2 year yield is at 1.46%. It’s clear the Fed won’t hike or cut rates on Wednesday. Many don’t expect guidance for a cut in March. CRB Commodities ETF is now down 6.34% year to date. Commodities inflation will be low again.

Apple Reported Great Earnings

Many investors expected wearables to do very well, but were bearish because of its high valuation. Turns out, investors appear to be more concerned with the former than the latter. There’s no solace in the fact that the stock only rallied 1.51% after hours. Especially since it already rallied sharply during the day.

Apple’s EPS was $4.99 which beat estimates for $4.55. No one cares that Apple’s net income fell by $2 billion from last year. Even as a mistaken bear, I wouldn’t suggest that matters. Investors look at the value they get per share. Buybacks help that significantly; it’s how markets work. Revenues were $91.8 billion which beat estimates for $88.5 billion. 

As you can see in the chart below, revenue growth was 8.9%. iPhone revenue was $55.96 billion which beat estimates for $51.62 billion. Services revenue of $12.7 billion missed estimates for $13.07 billion. Apple is still a hardware company (iPhone is 60% of revenues), but that nuance doesn’t matter if iPhones and wearables beat estimates.

Other products revenue was $10 billion which beat estimates for $9.52 billion. Gross margins were 38.4% which beat estimates for 38.1%. The iPhone is a high margin product, especially the higher end devices. Q2 revenue guidance was between $63 billion and $67 billion which easily beat estimates for $62.45 billion. 

Guidance range was widened by the coronavirus, meaning the lower end would have been higher if it wasn’t for that one time event. Q2 margin guidance was between 38% and 39%. Midpoint beat estimates for 38.2%.

Tim Cook stated there was more demand than supply for its $199 Apple Watch Series 3 and AirPods Pro. Wearables, Home, and Accessories grew revenues 37% yearly. 75% of Apple Watch customers bought their first Apple Watch in the quarter. Services revenue growth was 17% as sales reached $12.7 billion. Apple now has 1.5 billion active devices it can sell services to.

The chart below shows the EPS machine that Apple is. The grey bars indicate price declines which are all about 40%. A modest decline in EPS recently probably didn’t warrant the decline the stock had in Q4 2018. But it has recently been argued that Apple has more than made up for that correction. The fact that Apple stock didn’t fall after hours is a win for this stock as it has done very well since that late 2018 decline.

Even though Apple has been buying back stock quickly, its cash pile rose from $205.9 billion to $207.06 billion. Look for even more buybacks in the future. The firm spent $20 billion on buybacks in this past quarter which was up from $18 billion in the previous one. 

Apple has bought back $319 billion in stock in the past 7 years. That’s more than the market cap of 490 of the firms in the S&P 500.

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1 Comment

  • Kevin Morgan

    January 30, 2020

    re: coronavirus, everyone should know that the flu routinely kills 250,000 to 500,000 people around the globe EVERY YEAR. The flu is a big killer. Coronavirus deaths at a few hundred (or perhaps in the end a few thousand?) is a tiny little blip in the "every year" flu "epidemic", which most years gets little press. And coronavirus isn't even particularly deadly, with a low mortality rate of around 2-3%, vs. for example SARS which was something more like 8-10%. So this entire media frenzy is exactly that. It's...just...the flu. Which is not to say the measures being taken are inappropriate; defensive measures are appropriate. But the hoopla is simply unwarranted. In my opinion, based on the data I have, anyway.