September 18, 2012 - Apple: The 800 Pound Gorilla in the Market by Van Tharp Institute of Trading Mastery
"Don't use words too big for the subject. Don't say "infinitely" when you mean "very"; otherwise you'll have no word left when you want to talk about something really infinite."-C.S. Lewis
If you ask a bunch of six-to-eight-year-olds what animal fascinates them the most, chances are pretty good that at least one of them will say "Tyrannosaurus Rex" or some other dinosaur. They might also talk about whales (biggest animal), elephants (biggest land animal) and even Mt. Everest (tallest mountain). Quite simply, we have a love affair with big things from a very young age.
Idioms, clichés and jokes reflect our obsession with "big." The phrase "elephant in the room," for instance, is used when people choose to ignore a big issue that is staring them in the face. Or how about this joke, which is sometimes used as a metaphor for a person or an organization whose power allows them to ignore social or legal protocol and do whatever they darn well please:
Q: Where does an 800 pound gorilla sleep?
A: Anywhere it wants to.
Today, we'll look at the stock market's current love affair with something big-the biggest publicly owned company of all time, Apple. More specifically, we're going to look at the effect that Apple now has on associated indexes and the rest of the market. I'll also make a couple of fearless predictions about where the stock price for this 800 pound gorilla could be heading.
For the six-year-old in us all, let's look at a few of Apple's superlatives:
Much has already been said about Apple passing Microsoft's valuation at the height of the internet bubble in 2000 to become the most valuable publicly traded company of all time. But just how big is big? As of the second week of September 2012, not only is Apple the most valuable company, its market capitalization is 50% greater than number two on the list, Exxon Mobil, and three times bigger than number ten, AT&T!
Despite its market cap leadership, Apple does not have world-beating cash flow, net profits or even total cash (though it does really well in those areas). It does have extremely high profits for a tech company (the highest of all time), and it provides very high returns from its asset base. In that regard, it looks more like a services company than a tech giant.
Oh yeah-and all that cash. At end of June 2012, Apple's cash hoard (cash + short and long-term investments) was up to $117 billion.
From its January 2009 lows to its September 2012 highs, Apple's share price rose an astonishing 773.77%.
The Apple Effect
Two weeks ago, in the Trading Tip section of Tharp's Thoughts, I included an interesting graphic that showed the MSCI composite of all U.S. equities as one of a very few equity indices worldwide that had eclipsed the highs put in back in 2007. You can see that article here.
If we look at the monthly bar charts for individual indexes back to 2007, we can see something particularly noteworthy: the cash index for the Russell 2000, the S&P 500 and the Dow Industrials have all remained below their 2007 highs in 2012:
On the other hand, the NASDAQ climbed above its 2007 high last year, then continued that climb in 2012. In fact, it's not just a little above the 2007 high; it's a full 25% above it! See the monthly chart below:
The reason for this index's vast outperformance lies almost solely on the shoulders of one stock-the very one we're exploring today. Apple's outperformance is nothing short of phenomenal during this period. Let's look at the chart for the sweetheart of Cupertino for that same time period. Note that the infamous iStock has peaked out at gains of 237% above the 2007 highs!
Apple Stock: An Island of Outperformance
Apple, with its combination of huge size and huge outperformance now drives equities performance to such an extent that it has become difficult to get a clear picture on market health just by looking at index price moves. For this reason, the Wall Street Journal reports that strategists at top firms including USB, Goldman Sachs, Morgan Stanley, Barclays and Wells Fargo have started excluding Apple when they look at indexes and earnings calculations. Here are two eye-opening "ex-Apple" statistics:
For the 2011 fourth quarter, the S&P 500 posted a year-on-year increase of 6.6%. Ex-Apple, that increase dropped to just 2.8%!
On May 2, 2011, Apple's weighting in the Nasdaq 100 was trimmed from 20.5% to 12.8%-a whopping 38.5%. From that date until September 5, 2012, the Nasdaq 100 went up 16%. Ex-Apple, that gain was only 5.4% percent! In other words, Apple made up more than 71% of the Nasdaq 100's gains for that 16-month period. I find that jaw-dropping.
Apple Stock: Where to From Here?
With the huge outperformance that Apple has enjoyed since Nasdaq cut its index weighting last year to 12.8%, what would you guess is Apple's percentage weighting of the total Nasdaq 100? Etfdb.com lists Apple as being back up to 19% as of September 6, 2012! Almost as amazing is Apple's weighting in the whole S&P 500 at 4.9%.
Unless Apple has a serious price pullback on its own, the Nasdaq will be forced to reduce the stock's weighting once again. To continue to match the index, many funds and institutions will have to sell some Apple holdings at that point, which would put significant downward pressure on Apple's price.
In addition, Apple unveiled the iPhone 5 today. This could set a classic "buy the rumor, sell the news" dip after the market digests all the hoopla around the announcement.
Combine these multiple influences, and Apple looks ripe for a correction. But given the company's recent record for innovation and execution, any such dip would likely be no more than a breather on the way to Apple 1000. That phrase alone should strike fear into the hearts of Apple followers everywhere. Just ask anyone who owned Qualcomm options in 2000.