As one of the biggest weeks of the current earnings season rolls on, U.S stocks are higher on Tuesday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI ) up 0.52% and 0.41%, respectively, at 10:15 a.m. EDT. Two of the three most valuable companies in the Nasdaq Composite (NASDAQINDEX: ^IXIC ) -- Apple (NASDAQ: AAPL ) and Microsoft (NASDAQ: MSFT ) , with a combined market value approaching $1 trillion -- will report their quarterly results today after the market close.
According to a report from investment bank Goldman Sachs, Apple remains one of the most significantly underweighted stocks in the S&P 500 among large-capitalization mutual funds. A stock is "underweighted" if it represents a smaller percentage of the fund's assets than the stock's weighting in the S&P 500. Apple is the largest component in the S&P 500, with a weighting of 3.23% as of July 18.
When a fund manager underweights a stock, it reflects the belief that shares will underperform the index over some specific time horizon (note that the time horizon is often, unfortunately, very short term, as little as a few quarters). But so far this year, Apple has risen more than 17% while the S&P 500 is up less than 7%. In fact, last week, Apple came close to regaining its all-time high of $100.82 (split-adjusted), set in September 2012.
Sentiment regarding Apple has clearly reversed since the spring of 2013, when the stock bottomed out at $55.07 (split-adjusted). However, Goldman's analysis suggests there is still some fuel for additional gains if fund managers continue to come around regarding their view of the stock.
Perhaps hedge funds, which often turn their portfolios over more quickly than mutual funds, are a leading indicator of that shift. In May, Goldman Sachs published a list of the 50 most widely held stocks among 777 hedge funds representing $1.9 trillion in assets under management. Apple was the second stock on the list, with 51 funds naming it in their top 10 holdings; the company's average weighting within those funds' portfolios was 8% -- two and a half times its current weighting in the index. (In case you're wondering, the No. 1 stock on that list was Apple rival Google.)
This afternoon's quarterly report are a potential catalyst for improved sentiment and a shift from underweighting toward overweighting. I suspect last quarter's results, which were well received, also fulfilled that role (at least as far as improved sentiment is concerned, certainly). Apple investors will be eagerly anticipating more of the same today.
Shares of Microsoft have also clearly benefited from a change in sentiment since Steve Ballmer announced 11 months ago that he would retire as chief executive officer; they're up nearly 20% year to date. Earlier this month, new CEO Satya Nadella set out his vision for Microsoft as a "productivity and platforms company." Following last week's announcement of 18,000 job cuts, analyst and investors will be looking for more clues today regarding the company's areas of strategic focus under this vision.
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