I often toy with numbers to get a sense of what the risk might be in extreme circumstances (like we’re experiencing in the markets). For instance, what “if” the FAANG stocks, Facebook, Amazon, Apple, Netflix and Google (Alphabet) all traded at an average market multiple of 15X earnings? Which stocks are at the most risk.
This may sound overly simplistic but hey, I’m simple too. You might argue that’s far too low a multiple given how low interest rates are, but I’ve been around a long time (I recall 20% interest rates) and interest rates are unnaturally low. Especially so in light of the fact inflation seems to be on the up-tick. In any event, this is just for fun.
Of course the vulnerabilities of the different businesses to the supply chain risks are hardly equal; and the impact of an economic slowdown or recession will impact their growth trajectories in different ways etc. Nevertheless here is the result:
If just for fun, why would I bother with the exercise? As I mentioned in a previous article about tech ETF’s, I’m no longer concerned about the downside (what’s past is past) but looking to identify anything I can use to identify my next entry point. Hardly scientific, but I’d very likely step back into Apple before the others, followed by Facebook and Alphabet when (or if) they get closer to the point Apple is at. Apple is down 11% since I last commented on it but I still expect it to trade down more as we learn about demand disruptions (and supply chain issues) due to coronavirus.
For the record, I sold the funds I held in my own TFSA back in September of 2018 – when I began to worry about a market correction. I was too early on the exit to be sure, but now I’m not feeling so bad. Don’t be fooled by Friday’s up-tick in the group – short-covering before a weekend is not unusual.