How Worried Should You Be About Inflation? [Economic Study]
06/15/21
Blue Chip Partners Quarterly Edge [Q3 2021]
07/08/21
Eggs, Milk, Apple Inc.?
The media loves stirring the pot over inflation. If inflation were to sky rocket, Big Tech companies would be negatively impacted. Is it possible the media is missing the forest for the trees? Perhaps they should be focused on why Big Tech is proving resilient. We believe the recent bid in Big Tech is attributed to extraordinarily sound fundamentals (cash flows, balance sheet, margins, etc.)
If you’ll recall, Big Tech was THE safety trade during the COVID crash in March of 2020. As the underlying signs of market breadth deteriorate (illustrated below), could investors be flocking into names like Apple and Microsoft as a place to safely hide out?
As you can see, over 91% of companies in the S&P 500 were trading above their respective 50 day moving averages on April 15th. While the index has proceeded to register all time highs, this breadth measurement has since declined to under 48% (as of June 28, 2021.)
With bulletproof balance sheets, the likes of Apple and Microsoft are among the best positioned to weather most adverse market environments. Given their NEGATIVE net debt balances, Apple and Microsoft stack up well against both the broader market and the Consumer Staples sector.
The following real world example illustrates Net Debt/EBITDA, a ratio that indicates how well a company can cover its debt obligations through operating performance (lower is better.)
Further, Apple and Microsoft display increasingly predictable revenue and profit streams. Think about it – corporations are more likely to power up a Microsoft product (e.g. Outlook) before they even turn the lights on in the morning. Apple is heading in the same direction given its emphasis on the services business. As a result, these firms display hefty operating profit margins.
Viewing the market through this unique lens is one example of what differentiates the capabilities of the investment process at Blue Chip Partners.
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