If you really want to know the pulse of the market look no further than Apple. In Goldman Sachs’ recently released hedge fund trend monitor it revealed that 75 hedge funds own Apple as a top 10 holding. To put this in perspective the next tech company on Goldman’s list, Microsoft, is a top 10 holding of only 34 hedge funds. There is no better indicator of big money intentions than Apple stock action.
Many have suggested that Apple stock is out of favor now that it has surpassed Microsoft in market cap; nothing could be further from the truth. Year to date performance shows Apple is up 15% while the Dow is down 4%. This stock is still a great place to put money as a long term investment. At economictiming.com we’ve learned that if you want to make money in this market, you better have a sophisticated understanding of Apple’s fundamentals and be in tune to its trading patterns. If Apple can’t run, the market won’t sustain a rally. If Apple doesn’t drop, the market won’t sustain a selloff.
The next major move for Apple will be a result of the following six market variables:
1- Investors respond well to the optimism of the September iPod event. Although the iPod no longer contributes a significant portion to Apple’s earnings growth, it’s the best event in terms of stock action. Since 2006, (excluding the outlier 2008 financial crisis) Apple stock averages a 48% return between the August low and the end of the year. This year’s August low of $235 looks like an ideal entry point, a 48% rise would take us to $350 by year end. Apple’s best stock performance occurs during Q4 of big product release years. Q4 2010 looks promising because Apple finally appears to have increased iPad production to meet demand. The iPad will be the hot gift of the holidays. Consider Q4 2010 to be the king of seasonal momentum.
2- The sentiment toward pro-growth government policy is improving. With 25% of jobs tied to the construction industry there will be no sustainable recovery without it. The first step is to reduce housing inventory and it seems the Obama administration is finally listening to Wall Street. On Monday the President exhorted Congress to pass new aid packages for housing and for small business when they return from summer break. Among the possibilities include a tax credit for buying foreclosed properties, an extension of the Bush tax cuts, upping the nation’s investment in clean energy, and rebuilding more roads and highways. In addition, it is expected that House Republican leader John Boehner will announce a governing agenda in September that will educate voters on Republican plans should they take a majority in the House. The #1 principle of this plan is to extend tax cuts, Boehner quoted John F. Kennedy, “An economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs.” Investors will respond positively to any pro-growth policy presented by Washington in September.
3- The iTunes cloud opens the door for Apple to enter the living room. Downloading was for music. Streaming is for video. The implementation of Apple’s acquisition of LaLa into iTunes should get Apple geared up for this next phase of growth. Hopefully we’ll hear all about the iTunes cloud at the September 1st event and then we’ll see the new version of Apple TV in January. Apple is the best in the business at innovating according to the calendar. A January product announcement happens like clockwork and 2011 is poised to be the year of the cloud. In the last conference call we heard that the massive $1 billion North Carolina data center was on track to be operational by December. If investors like what they hear on September 1st, the big money will begin pricing in this next leg of Apple’s business.
4- Speaking of the big money, reports show that huge amounts of capital are sitting on the sidelines. A Reuters poll showed that U.S. fund managers cut exposure to equities from 65% in July to 61.5% in August. ICI reported that total equity funds had a $12 billion outflow in July and August in addition to the $32 billion in outflows since the Flash Crash. We at the E Weather Station still have 65% of the portfolio in cash. Needless to say, there is plenty of ammunition to fuel a rally into year end.
5- Low valuation. The forward P/E ratio for the S&P 500 is 12. The 13 forward P/E for Apple is the lowest of the Steve Jobs era. The financial crisis, the uncertainty of housing, the uncertainty of Europe, and the uncertainty of Obama policy have all caused this dramatic decline in valuation. Investor Sentiment as calculated from Investor’s intelligence, Market Vane, American Association of Individual Investors, and the put call ratio shows an extreme bearish bias which typically leads to accelerated stock market gains. The market expects bad economic data. The market is priced for a European crisis. So what happens when the next crisis fails to evolve? In my book, The Alpha Hunter, I discuss the characteristics of this new Wall Street environment in which investors have been scarred by two of the worst market selloffs in history since 2000. There are going to be many false alarms as a result of the quick trigger behavior. This current period of economic recalibration looks to be nothing more than typical in the aftermath of the financial crisis. This realization could produce a significant ‘sigh of relief’ rally into 2011.
6- I agree with Cody Willard’s clarion calll to invest in the App Revolution any way you can. Over the next three years there will be over one billion app-enabled smart phone users on the planet. The shelf life of these phones is minimal compared to a PC. Consumers replace their phones every two years. This kind of sales potential represents an underestimated gold mine for the iPhone. Access to mobile apps is quickly evolving from a ‘want’ to a ‘need’. As investors breathe a sigh of relief, they will discover that this App Revolution is a once in a lifetime opportunity that will define our generation. Apple’s growth rate will shatter any historical precedent for a mature company of similar size.
In conclusion, we like the current investment climate as an opportunity to continue averaging back into the market. Apple is especially appealing because of the iPad catalyst, Q4 seasonality, pro-growth government policy, the iTunes cloud, low investor sentiment, low valuation, large amounts of capital on the sideline, and the App Revolution.
Disclosure: Long AAPL