With approximately 10.7 million users, subreddit r/wallstreetbets entered the mainstream following an epic GameStop (GME) short squeeze earlier this year. The forum has triggered red-hot price rallies in several stocks this year, including Apple Inc. (AAPL), Microsoft Corporation (MSFT), AMC Entertainment Holdings, Inc. (AMC), and Clover Health Investments Corp. (CLOV). These names are still among the top ten most discussed stocks on the forum. However, while the AMC and CLOV rallies were essentially a consequence of a short squeeze, that isn’t the case with the other two stocks.
Tech stocks have gained significant momentum amid the COVID-19 pandemic. Furthermore, with robust digitization occurring in almost every industry, and with 5G being deployed widely, tech companies are seeing a surging demand for their products and services. So, considering the tech sector’s solid growth attributes, we think AAPL and MSFT could be great picks now.
In contrast, the social-media-triggered interest of retail investors, and the excessively stretched valuations of AMC and CLOV, could potentially lead to these shares retreating in price in the near term. Given their shaky fundamentals amid heightened market volatility, we think AMC and CLOV are best avoided now.
Stocks to Buy:
Apple Inc. (AAPL)
APPL is one of the largest manufacturers and suppliers of consumer electronics. Its market dominance in the tech world is unparalleled. Also, the company’s innovative edge and brand value have allowed it to enjoy strong growth over many years.
Last month, AAPL announced that GarageBand for iOS and iPadOS now includes all-new Sound Packs from some of today’s greatest artists and producers, allowing consumers to unleash even more musical creativity. In addition, for the first time, users can learn how to remix directly inside the app with all-new Remix Sessions. This development could contribute to the company’s leadership position by enhancing its brand value.
Also in June, AAPL launched Apple Podcasts Subscriptions, a global marketplace for premium podcast subscriptions. Listeners in more than 170 countries and regions can now purchase subscriptions for individual shows and groups of shows directly on Apple Podcasts. These new features could help the company boost its revenue and drive its business growth.
AAPL’s net sales increased 36.5% year-over-year to $81.43 billion in the third quarter, ended July 26, 2021. Its operating income grew 84.3% from its year-ago value to $24.13 billion, while its net income improved 93.2% year-over-year to $21.74 billion over this period. The company’s EPS has increased 100% from its year-ago value to $1.30.
A $5.58 consensus EPS estimate for the current year represents a 70.1% improvement year-over-year. Furthermore, AAPL has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters. Analysts expect AAPL’s revenue to increase 33.4% year-over-year to $366.12 billion in its fiscal year 2021. The stock has gained 18.9% over the past year and 27.9% over the past nine months.
AAPL’s POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
AAPL has been rated a B for Sentiment and Quality. Within the B-rated Technology-Hardware industry, it is ranked #20 of 45 stocks.
To see additional POWR Ratings for Growth, Value, Stability, and Momentum for AAPL, click here.
Microsoft Corporation (MSFT)
MSFT develops and supports software, services, devices, and solutions worldwide. It operates through Productivity and Business processes; Intelligent Cloud; and More Personal Computing. The company sells its products through OEMs, distributors, and resellers and directly through digital marketplaces, online stores, and retail stores.
Last month, MSFT introduced Windows 365 on Wednesday, a cloud service that gives companies of all sizes a new way to experience Windows 10 or Windows 11. The service is a notable development as companies worldwide continue to grapple with the best methods to support hybrid work models in which people work both on-site and remotely.
During the fourth quarter ended June 30, 2021, MSFT’s revenue increased 21.4% year-over-year to $46.15 billion. Its operating income grew 42.4% from its year-ago value to $19.09 billion. The company’s net income increased 46.9% year-over-year to $16.46 billion, while its EPS surged 48.6% from the prior-year quarter to $2.17 over this period.
MSFT is expected to generate 14% revenue growth for the current year. In addition, its EPS is estimated to increase 8.8% year-over-year to $8.76 in 2022. Over the past year, MSFT’s stock has gained 39.5% in price. And it has gained 35.9% so far this year.
MSFT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. MSFT has an A grade for Sentiment, and a B for Stability and Quality. Among the 145 stocks in the Software – Application industry, it is ranked #10.
In total, we rate MSFT on eight different levels. Beyond what we’ve stated above, we have also given MSFT grades for Growth, Momentum, and Value. Get all the MSFT ratings here.
Click here to check out our Software Industry Report for 2021
Stocks to Avoid:
AMC Entertainment Holdings, Inc. (AMC)
AMC is a movie theater chain that operates through two segments: Domestic and International markets. It licenses first-run films from distributors controlled by film production corporations and independent distributors on a film-by-film and theater-by-theater basis. It operates 1,004 theatres and 11,041 screens across 15 countries.
In June, AMC raised $230.5 million from the sale of 8.5 million shares of its common stock. AMC will use the proceeds from the transaction to buy more theater leases and to paydown debt. However, its sale of shares could result in the dilution of its shareholder value.
AMC’s total operating expenses have increased 51.1% year-over-year to $741.3 million, while its operating loss came in at $296.6 million in the second quarter ended June 30, 2021. The company reported a $343.6 million net loss , and its loss per share came in at $0.71 over this period.
The stock could not beat the consensus EPS estimates in any of the trailing four quarters. In addition, analysts expect AMC’s EPS to decline at a 217% rate over the next five years.
Currently, AMC looks extremely overvalued. In terms of forward Price/Sales, it is trading at 9.06x, which is 413.4% higher than the 1.77x industry average. In addition, its 12.84x forward EV/sales is 383.1% higher than the 2.66x industry average.
AMC’s poor prospects are also apparent in its POWR Ratings. The stock has an overall D rating, which equates to Sell in our proprietary rating system.
The stock has an F grade for Value and Stability, and a D for Sentiment. AMC is ranked #6 of 8 stocks in the F-rated Entertainment- Movies/Studios industry.
Click here to see the additional POWR Ratings for AMC. (Quality, Momentum, and Growth).
Clover Health Investments Corp. (CLOV)
CLOV is a Medicare Advantage insurer in the United States. The company offers preferred provider organization (PPO) and health maintenance organization (HMO) health plans for Medicare-eligible consumers through its software platform.
This month, the international securities and consumer rights litigation company Scott+Scott Attorneys at Law LLP started investigating whether some directors and executives of Clover Health Investments, Corp. violated their fiduciary obligations to SCH III and its shareholders. This controversy could negatively impact CLOV’s stock price in the near term.
For the second quarter, ended June 30, 2021, CLOV’s operating expenses increased 299.1% year-over-year to $594.33 million. Its operating loss came in at $181.86 million, compared to a $23.17 million operating profit in the prior-year period. Its net loss amounted to $317.61 million, compared to $5.40 million in net income in the second quarter of 2020. The company reported a negative adjusted EBITDA of $138.72 million, compared to a $24.79 million adjusted EBITDA in the year-ago quarter.
The company’s EPS is expected to remain negative in the current year. CLOV’s stock has declined 10.1% in price over the past six months. In terms of its trailing twelve months Price/Book, CLOV is trading at 11.46x, which is 199.9% higher than the 3.82x industry average.
CLOV’s weak fundamentals are reflected in its POWR ratings. The stock has an overall F rating, which equates to Strong Sell in our POWR Ratings system. The stock also has an F grade for Value, Sentiment, and Stability. In the B-rated Medical – Health Insurance industry, it is ranked last of the 11 stocks.
In addition to the POWR Ratings grades we have just highlighted, one can see CLOV ratings for Momentum, Quality, and Growth here.
AAPL shares were trading at $147.98 per share on Thursday morning, down $0.38 (-0.26%). Year-to-date, AAPL has gained 12.05%, versus a 20.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More…
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