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Over the weekend, I decided that it was time for me to take action within the Young and Restless aggressive retirement portfolio, that I never believed I would take for a very long time. I am selling Apple.

The "Young and Restless" portfolio consists of Apple (AAPL), Amazon (AMZN), Google (GOOG), Facebook (FB), Netflix (NFLX), Yahoo (YHOO), Achillion (ACHN), and Zynga (ZNGA).

I believe that the slowing growth and declining margins that Apple has been faced with, have turned Apple into a monster value company with enormous cash reserves and a decent yield of over 2.5%. The stock may be a perfect fit into many other retirement portfolios, such as the Team Alpha portfolio. I added Apple to that portfolio at $450/share.

Growth Slowing And Margins Dropping

While writing this article, I was asked this question by one of my readers:

SloshkongComments (9)

hopefully they will develop another gold standard product, and the direction they are going will stall growth. Android has raised their bar in market share. Apple is fearing the competition and is taking the approach "if you can't beat them then join them"

I have purchased the Apple TV box and after using this product I have a hard time seeing AAPL coming out with an Actual TV that will be much more innovative than what the Apple TV box is already capable of.

With Apple's new direction towards lower margins and stalled growth, should the young and restless portfolio still have Apple as the anchor?

It actually is a great question. Since reviewing some of the obvious signs of direct competition, cannibalization, and margin erosion, I have determined that selling Apple from this portfolio, but keeping it within the dividend income portfolio, Team Alpha, I am making a sound decision.

Android products are making inroads, and increasing market share, while the iOS system is losing market share.

  • Android went from 51.3% to 69.7% market share in one year.
  • iOS went from 23.6% to 20.9% market share.
  • The average price point has gone from $535 to $467 on the iPads last quarter. This had a direct effect on margins.

Now, Apple is considering a cheaper iPhone and as noted in that previous article from an analyst following the situation:

We do not believe Apple could build a low-cost iPhone of reasonably acceptable quality for less than $180. If we reason that the company would have to price a low-cost iPhone at $250 or less to open up significant new unit share, this suggests that the device would generate maximum gross profit per unit of approximately $70, which compares poorly to our estimate of current gross profit per iPhone of $295."

$70 gross profit vs. $295 gross profit is significant, and the company would need to sell at least 4 times the number of cheap phones just to keep gross profits even. They might do it, or might not, but it is a huge mountain to climb from my standpoint.

The Cash And The Fundamentals Spell Value

In this article, I outlined the reasons why I was buying the stock for the Team Alpha portfolio:

Now those fundamentals have made it an even greater bargain for dividend seeking investors:

  • An enterprise value of roughly $450 billion makes Apple the 2nd largest company on the planet, now trailing only Exxon Mobil for that distinction.

  • An approximate $140 billion in cash without any debt. (Think about that for a minute)

  • A 35% operating margin as of last quarter (industry or sector average is about 29%).

  • YOY revenue growth of 18% and flat YOY earnings growth.

  • A current dividend yield of about 2.5% based on today's share price, with only a 6% payout ratio.

  • Nearly 70% of all outstanding shares are held by institutions.

  • An ESS Rating of "Bullish" to "Very Bullish."

  • A 2013 forward P/E of only 9.40, making this one of the most undervalued growth stocks ever recorded (the industry or sector average is about 12.50).

If the company is still growing at a 20% topline growth rate, making plenty of money, and has $140 billion in cash with no debt, I truly believe that we are on the verge of seeing Apple become a DIVIDEND WINNER, for our retirement portfolio!

Given the facts presented, I am VERY comfortable with owning Apple as a value stock. I will continue to question their growth potential until the company begins to innovate once again and refrain from using lower-priced products to cannibalize their amazing premium products.

The Bottom Line

I am not suggesting that Apple is a dead stock. I believe it is a fabulous stock. I am also NOT suggesting that investors buy or sell the stock based upon MY opinion and observations.

I believe that Apple has a wonderful future and a place in every portfolio, I simply happen to believe that the company offers much greater value than growth at this stage. That could change of course, but my obligation is to manage this portfolio for our readers and my followers.

Please do your own research and make your own investment decisions.

Source: The Young And Restless Portfolio: Selling Apple In This Aggressive Growth Portfolio