Over 2 years ago, I wrote "Apple: IF I could buy and hold only one stock, this is it." The premise was:
I've often been asked...if you could buy just one stock for your kid and hold it for at least 5 years, what would that stock be and why? Without blinking, I would always say AAPL.
- Steve Job's death wherein I wrote - "Apple: connecting the dots backwards."
- Is Tim the "right" choice? I wrote "Apple: Gearing up for Thermonuclear in 2012."
- Apple's earnings "miss" wherein I wrote: "Apple's earnings miss: De ja vu all over again, or, what lies under the Surface?"
- Too much ado about Forstall and Browett? I wrote: "Do you get harmony if everyone sings the same tune?"
So, how has this strategy fared and how has the story unfolded? Please pardon the length of the article as I only intend to write once a year regarding Apple.
Excluding dividends, it underperformed the broader market over the same time period with a CAGR of 16.70% vs. 16.64%. 2011 was uneventful (closed at $405); 2012 wasn't bad (closed at $532) but it has been painful to being flat YTD ($525.96). The pain (seeing the other big tech stocks go up) was also reflected in the mechanical trades I took in my trading portfolio:
Given the drawdowns in 2012, I've tightened my stops to 10% from my entry prices.
So, where do we go from here? Will I still continue to hold Apple as the only stock in my kids' main portfolio over the next 3 years? Absolutely and here are my reasons why:
The Technical perspective:
1. Relative to the other big name technology stocks; Apple has been underperforming for an extended period of time. Notice the following relative charts:
While it is not surprising that Google (GOOG) has outperformed Apple over the same comparable time period...
Even good old boring Microsoft (MSFT) has joined the fray...
Most of the big name technology stocks that I follow have reported earnings that have exceeded expectations. Assuming Apple reports healthy margins and guidance, I wouldn't be surprised if money rotates back to Apple again.
2. Patterns can sometimes be predicative of what lies ahead...
Assuming we have a reverse Head and Shoulders pattern forming here, I'd love to be able to add more to my position if it retraces (low $500s range) DESPITE announcing increased margins and guidance.
So, what can trigger an initial breakout towards $600?
The Fundamental Perspective:
1. Apple guides towards a higher gross margin (above 39 at least) and higher guidance for the next quarter (typically their busiest time of the year). Given that it is extremely undervalued vis a vis its peers, it is bound to have a P/E expansion. Consider the following valuations ...
It is also interesting to note (based on the data provided by FinViz.com) that while Apple is expected to grow its EPS in the next 5 years at the same level as Google; Apple trades at a fraction of Google's P/E [current or forward P/E). It is also good to remind ourselves that any form of fundamental valuation will not prevent a blood bath if sentiment is against it (we all know what happened to BlackBerry (BBRY)].
2. Apple's massive share re-purchase plan can and will influence future results. Remember the time when Cisco (CSCO), Dell (DELL), IBM (IBM), Microsoft, Intel (INTC), and the like were able to beat earnings estimate by a penny or more? What did they have in common? While Karl Icahn isn't logically wrong in implying that a lower share count (via a massive $150B buyback) can provide a temporary boost in share price; his intentions are short term and should never ever be misunderstood as being aligned with Apple's long-term interests.
The Macro Perspective:
1. When will pundits realize that the Emperor has no clothes? Collectively, Android owns at least 75% of the Global smartphone market. Apple, on the other hand (despite being the ONLY iPhone maker), continues to ship record amount of iPhones annually. Is Apple really "losing" to Android or has the market expanded?
2. Why is Apple giving away its core software (iOS7, Mavericks, iPhoto, Numbers, Pages, et al) and possibly its future updates for free? Meanwhile, Google has always provided its email and suite of productivity software for free as well. It appears, therefore, that Pincer movement is occurring against Microsoft. If Microsoft continues to withhold releasing Office to the iPad line, consumer will learn to replace it with alternatives over time (I would argue that has already happened). If it releases it; Surface may never gain traction.
Have your kid use one (iPod Touch) - and say goodbye to Nintendo DS and PSP - those are "so yesterday," as they would tell you.
Fast forward to today; is it then a surprise that Nintendo (NTDOF) is struggling today? I don't see this trend changing anytime soon; anytime there is a significant shift in platform choice, the outcome becomes almost predictable.
The A7/M7 combo will herald the new generation of apps that will continue to tightly integrate Siri, Maps, Passbook, and iBeacon (to name a few) to the iOS and OS together. I would strongly suggest you read this post by Kontra titled "Is Siri really Apple's future?" What happens when you extend this concept to gaming and entertainment (i.e. TV)?
4. Tim is a great leader. Is he perfect? Who is? After 2 years of observing his moves (Browett, Forstall, Mapgate, China Warrantygate, Arhrendt hire, etc. ...), I know Apple is in good hands.
5. The Rashomon effect, when it comes to valuing Apple, will continue. Consider the following:
- Last year, Apple sold 5M iPhones in 3 days...apparently, it was doomed.
- This year, Apple sold 9M iPhones in 3 days...apparently, it is still doomed!
- Last year, Apple didn't pay any dividends or offered to buy back its shares...apparently, it was doomed.
- This time, it pays a dividend and has a buyback program...apparently, it is still doomed!
It was a great reminder that success can come if you have an open mind (hint: it isn't a bad thing to diversify your holdings with the "right" stocks!).
All the best!