Bubble stocks down 40%; Apple says demand is weakening

Our bubble basket is trading 19% below its 50-week average which is the biggest negative spread since inception in January 2016 suggesting we are entering a new period with a different rhyme in equities. Mega caps, high quality companies, mining and energy, logistics, semiconductors, cyber security themes will continue to do well in environment with higher inflation.

The table below shows the 40 stocks that are in the bubble basket, which will be reviewed in January, and despite the massive selloff the median 12-month forward EV/sales ratio is still 21.3x, and the median year-to-date return is -21%. The best performing stock is Cloudflare which delivers critical software for internet infrastructure such as streaming and load balancing of servers. The worst performing stock has been Yatsen which is a Guangzhou based cosmetics company from China which has not delivered on growth expectations but also caught up in the generally weak sentiment on Chinese equities. Despite the sharp selloff in bubble stocks the median price target remains elevated around 51% above the current prices of these bubble stocks.

Is Apple demand suggesting inflation is becoming a problem?

For the past year Apple has experienced problems with getting enough semiconductors for its products including the iPhone 13 which was recently cut 10% on production due to supply constraints. But now the technology company is facing a different problem with Apple telling its suppliers that demand is weakening into the holiday season. Apple shares listed in Germany are down 1.7% and some its key suppliers were down 4-11% in the Asia session. While we have little information to go with here it could be an early sign that the current inflationary pressures are beginning to impact demand for higher priced consumer goods including smart phones.