It's a question every investor faces each time a portfolio's idle cash is ready to be put to work. Is it smarter to seek safety in numbers and step into a broad market index fund like the Invesco QQQ Trust (QQQ 1.85%), which mirrors the performance of the Nasdaq 100 index? Or, can taking a swing on an individual stock be justified given that stock's current price and risk/reward profile?
Somehow, though -- with the Nasdaq Composite (^IXIC 2.01%) deep into record-high territory (and still moving deeper) on the heels of a 120% run-up from lows reached in March of last year -- the question seems even trickier now. Adding to this uncertainty is the fact that some of the names that led most of the rally are starting to falter.
Amazon (AMZN 1.66%) stock, for instance, is down 11% from its July highs, with most of that loss being the market's response to the company's second-quarter revenue shortfall. Facebook (FB 2.11%) is another unlikely laggard that could infect other key technology names. Its stock is within sight of record-high levels, bouncing back from its post-earnings setback marred by a disappointing growth outlook. It wouldn't take much for traders to extrapolate these themes and apply them to other names.
Image source: Getty Images.
But if you're itching to make a stock purchase sooner than later, this is a scenario where the recent weakness from Amazon makes it a better opportunity than something broad-based (and overbought) like the Nasdaq itself.
Why not the Nasdaq Composite?
Don't misread the message. Five years from now, buying into the Nasdaq now versus buying into it two months ago or two months from now won't matter ... much.
Still, there are a couple of concerns that just might reward patience before making a purchase. One of these impasses is timing.
While watching a calendar isn't necessarily the best use of an investor's time; it would be a bit short-sighted to look past the fact that the upcoming month of September is typically a lackluster one for the market. Data from Yardeni Research indicates that between 1928 and last year, the S&P 500 index (^GSPC 1.51%) has averaged a loss of 1% in September -- the worst-performing month of the 12. Perhaps more amazing is the fact that September is the only month of that 92-year span that's seen more losses than wins; the bears are winning 50 to 42. The Nasdaq Composite isn't the S&P 500, but the two indices are in the same boat, largely working with the same stocks. The fact that we're entering this year's September so far ahead of where we'd normally be only bolsters the near-term bearish argument.
The other worry is a bit more nuanced, but also quite obvious. That is, the delta variant of COVID-19 is spreading rapidly at the same time that all the recent stimulus-driven earnings growth is starting to level off. The aforementioned Facebook is one of the many companies to acknowledge this reality, with CFO David Wehner cautioning during last month's Q2 earnings call, " ... we expect year-over-year total revenue growth rates to decelerate significantly on a sequential basis as we lap periods of increasingly strong growth."
Facebook isn't the only outfit facing the same headwind.
So far, the market has escaped any real trouble stemming from this slowdown. But the potential for a pullback is still there.
Why Amazon?
The knee-jerk response to Amazon's second-quarter revenue miss is understandable, but perhaps overdone. Operating cash flow improved 16% year over year for the three-month stretch ending in June on the heels of a 27% increase in profits of $15.12 per share. This was still a far better figure than the $10.30 per share reported for the same quarter a year earlier. Forecasted sales growth of between 10% and 16% for the quarter currently underway marks a clear slowdown.
But consider the circumstances. In the third quarter of last year, online shopping in many ways was the only real shopping option for many. It's a tough comp! This is still Amazon, which was growing well before the pandemic took hold, and will continue to grow even when the coronavirus is put into the rearview mirror. Investors don't care -- or at least didn't seem to care in early August when they were still selling the stock in earnest, driving it more than 15% lower from peak to trough.
Arguably the even better reason to scoop up some Amazon shares while they're still priced 10% below last month's highs, however, is the fact that it's one of the few names that's not only mostly immune to the impact of a resurging pandemic, but is likely a beneficiary of a rekindled spread of COVID-19.
It also doesn't hurt the bullish case to point out that roughly half of the company's operating income produced through the first half of this year came from Amazon Web Services, which is also well-shielded from any impact of the pandemic.
Bottom line
Admittedly, it's not a terribly sophisticated comparison of two investment options. A comparison, however, doesn't have to be complicated to be correct. Sometimes the simplest approaches are the most effective.
And if for some reason you just can't learn to love Amazon or are still highly committed to index-based investing, that's OK too. As was already said, five years from now the entry point into either trade here won't matter too much either way.
