Are Alphabet Inc and Microsoft Corporation Set for a 1Q Pullback?

Alphabet Inc (GOOGL) and Microsoft Corporation (MSFT) have historically underperformed in the first quarter

Dec 30, 2016 at 11:50 AM
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Earlier today we took a look at the 25 top-performing stocks during the first quarter of the year, which included three underloved retailers. Now we're flipping sides to see which stocks tend to fall flat between January and March, per data courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. The chart below shows the 25 worst performers on the S&P 500 Index (SPX) over the past 10 years, and two names of particular interest are tech titans Alphabet Inc (NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT).

Worst 1Q Stocks December 30

Despite hitting an all-time high at $839 just over two months ago, GOOGL is currently lagging the broader market, up just 2% on a year-to-date basis. In fact, the shares this week lost hold of the round $800 mark, and they may struggle to get it back. Peak open interest currently resides at the January 2017 800-strike call, suggesting the level could emerge as resistance as front-month expiration approaches.

Today the shares are off 1% at $795.17, and more losses could be ahead. GOOGL has ended only three of the last 10 first-quarter periods in positive territory, with an average return of negative 2% for the quarter over the past decade.

Even after the equity's recent slump, however, optimism toward the Google parent runs high. Out of 29 analysts following the stock, all but two recommend buying the shares, and just one recommends selling. Plus, the average 12-month price target is seated deep in never-before-seen territory, at $967. Short interest on GOOGL is also low. After rising nearly 10% in the most recent reporting period, these bearish bets still account for a meager 0.5% of the security's total float.

If there is pessimism toward the blue-chip stock, it resides in the options pits. The stock's 10-day put/call volume ratio across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is seated just 2 percentage points from an annual high, at 0.89. Perhaps these recent put buyers are on to something, since it's an unusually attractive time to pick up Alphabet Inc's (NASDAQ:GOOGL) short-term options.

MSFT still has a lead over the broad market, up 12% 2016, after hitting a record high above $64 last week. But the stock has been positive in the first quarter just three times in the last decade, with an average return of negative 1.7% for the period. The shares are down 1% today, at $62.24.

Analysts are mostly bullish toward MSFT, with 20 out of 26 calling the stock a "buy" or better. Short interest is also low, representing just 0.7% of the equity's available float. Even options traders have maintained upbeat positions toward the Dow component -- MSFT's 50-day call/put volume ratio at the ISE, CBOE, and PHLX is seated in the high 86th percentile of its annual range, at 2.37.

And like GOOGL, Microsoft Corporation (NASDAQ:MSFT) is presenting a compelling opportunity for options buyers. Based on the stock's Schaeffer's Volatility Index (SVI) of 16% -- lower than 89% of all readings from the last 12 months -- MSFT's near-term options should be particularly well-priced, from a volatility perspective.

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