By Nigam Arora
Over-owned and under-owned
A key point investors ought not miss is that AT&T’s stock is under-owned. In contrast, popular stocks such as Facebook /zigman2/quotes/205064656/composite FB +0.85% , Netflix /zigman2/quotes/202353025/composite NFLX -0.53% and AMD /zigman2/quotes/208144392/composite AMD -0.11% are over-owned. Of course, Amazon and Apple are very over-owned.
When a stock is very over-owned, everybody who is going to buy it has already bought it. On negative news, sellers appear but there are no buyers. This can cause a major drop in a stock totally disproportionate to the news. Our long-time readers are already familiar that we have used this information and logic numerous times to give sell signals in popular stocks right at the top.
Since AT&T is under-owned by institutions, there is plenty of room for it to run up as they start taking new positions or adding to exiting small positions.
Pay attention to this scenario
Start with Arora’s Second Law of Investing and Trading: “Nobody knows with certainty what is going to happen next in the markets.”
Scenario analysis has been, in part, responsible for The Arora Report’s success. When various scenarios are analyzed in advance, investors are able to act before the crowd with conviction when one of the pre-analyzed scenarios starts unfolding. Think of the following scenario:
• China enters a major recession.
• Exports from Europe to China fall, and Germany enters a recession.
• The U.S. economy is about 70% consumer-based. At first Americans keep on consuming, preventing the U.S. from going into a recession, but after a while the U.S. also dips into a recession.
• Trade war with China escalates. China retaliates by making an example of Apple.
• The momo (momentum) crowd starts wholesale selling of expensive stocks such as Amazon. The recent aggressive selling in cloud stocks such as CrowdStrike Holdings /zigman2/quotes/212513426/composite CRWD -0.62% , Zoom Video Communications /zigman2/quotes/211319643/composite ZM +2.37% , Okta /zigman2/quotes/210420951/composite OKTA +0.02% and Twilio /zigman2/quotes/205796518/composite TWLO +0.10% should give less experienced investors a small taste of what may happen. Popular momo crowd stocks such as Shopify /zigman2/quotes/209033712/composite SHOP -0.65% , The Trade Desk /zigman2/quotes/207508089/composite TTD +0.46% , Fastly /zigman2/quotes/212251938/composite FSLY +0.59% and Veeva Systems /zigman2/quotes/202850210/composite VEEV -0.10% may lose 50%-80% of their value.
• The Federal Reserve responds by cutting interest rates to zero.
• Investors move into high-dividend-paying stocks such as AT&T.
• AT&T succeeds in selling non-core assets at good prices.
• Investors start perceiving AT&T as a safe stock.
Under such a scenario or even under less drastic scenarios, AT&T stock may end up outperforming Apple and Amazon.
When and how to buy
Investors ought to consider scaling in on dips. As appropriate, we will be providing precise buy zones and the quantity to buy in each buy zone.
Investors ought to resist the temptation of buying their normal full core position size on the positive Elliott news. There will be pullbacks.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. <INTERNAL-PAGE URL="/author/nigam-arora">Nigam Arora</INTERNAL-PAGE> is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.