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Apple Is My FAAMG Stock For The Rest Of 2019

Jul. 07, 2019 7:00 AM ETApple Inc. (AAPL)108 Comments

Summary

  • Apple's stock has underperformed the average of its FAAMG counterparts, but I believe the second half of 2019 will be different.
  • While 2019 challenges might not be overcome immediately, the top- and bottom-line growth impact from services and wearables should become increasingly more noticeable.
  • I believe 2020 will shape up to be a better year for Apple, even if the iPhone and China overhangs persist for a bit longer.
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Rocked recently by US-China tensions and the (possibly secular) decline in the global smartphone business, Apple's (NASDAQ:AAPL) stock has been one of the laggards among FAAMG names this year - outperforming only Alphabet (GOOG) (GOOGL) in 2019. But it is on weakness that I believe a high-quality stock becomes most attractive.

For this reason, I believe AAPL is perhaps the best FAAMG buy for the second half of the year.

Credit: 9to5Mac

To be fair, I do not necessarily believe that Apple will encounter meaningful, positive catalysts in the second half that catches the market by surprise. Also, I fully understand that Apple has challenges to deal with, particularly in what pertains to (1) a declining iPhone business that has yet to see a new model release to match the success of the iPhone X, and (2) a struggling China market, hurt by the double-whammy impact of a decelerating economy and trade concerns.

Instead, I believe AAPL is a good stock to own because expectations have been de-risked enough to reflect the short-term challenges, perhaps too much so for a company that still has quite a bit of runway ahead in the longer term. The chart below illustrates how AAPL now trades at a compelling long-term PEG (current-year P/E divided by long-term earnings growth, times 100) of 1.5x, not too far from the lowest levels of the past 12 months.

Lower valuation, however, does not tell the full story. While Apple continues to look for the light at the end of the tunnel on the smartphone side of the business (something that may not happen until the release of a 5G model, perhaps in 2020), I see in Services and the Watch two high-growth opportunities that should help to pick up the slack.

On the former, I

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This article was written by

DM Martins Research profile picture
20.56K Followers

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

- - -

Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

- - -

On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (108)

LazyGringo profile picture
So for those who wanted in, today is a good buying op. Rosenblatt Security is a small company with no known expertise in this field. They likely have no inside info or insight anymore than the talking heads on CNBC. Apple was also upgraded today but for some reason the downgrade is winning. I have a ton of AAPl already but will buy more if this continues into tomorrow.
SEC Investigator2 profile picture
Once Cook is gone you will see a surge, until then, stay away.
B
Cook did a great job.
c
Well it has surged in the past with Cook at the wheel. In fact Cook has added more value to a company than any other CEO ever. What value have you added? No need to answer we already know.
LazyGringo profile picture
SEC,. quit spamming insults against Tim Cook, it makes no sense and is annoying. What is your problem with Cook anyway? Are you homophobic or something? A Russian troll? Cook has been an excellent CEO, one of the best ever, and is in no danger of losing his job. In fact if Cook were to die or something AAPl stock would probably plummet 10%.
s
I appreciate all views on AAPL, but as a longterm investor there are concerns that I've not read much about. Mainly, has Trump's trade war done permanent damage to sales in China? The Chinese press has been brutal in response to the trade war and on America. Is this a valid consideration for the long haul for AAPL?
LazyGringo profile picture
Trump threw cold water on CHina but Apple and IOS are so strong and sticky amongst high end consumers especially who need privacy, that the cold water will all drain and evaporate soon. Also I hear that Chinese are proud that Apple makes products in their country and do not see it so much as a US company anymore. Also, the old rumor that Chinese were dropping Apple for patriotic reasons proved to be false. That story was based on one company telling its employees top use Huaweis many months ago. Then the CEO of Huawei came oujt and praised Apple as the industry leader and his mentor and promiksed no harm to Apple from the CHinese gov. So this whole idea about Apple doing terribly in CHina has been way overblown and within six months we should see a nice rebound in the numbers. Ditto with past bad news from INdia as Apple is now dedicated to making a cheapo iP{hone for that country and others like it.
davel profile picture
Not sure what you mean about damage to sales in China. Is this specific to Apple product sales in China or trumps effect on the Chinese economy?

American trade wars with China are not good for Apple as China is the largest phone market in the world. They are also a large market for the other products Apple sells.

So the political risk is absolutely a serious consideration for the company and Tim Cook spends too much time trying to mitigate any current or future damage to the prospects for the company due to trumps fixation on a trade war with China being a central pillar of his re-election hopes. Also do not discount trumps trade war with every other region.
c
@ glssmrbl,

Your point is well taken with one very large and distinct difference: Apple has free cash flow in excess of $60,000,000,000.00+ each year, and can afford 100 and 75 bazillion dollar buybacks while paying a $3.00+ dividend.

Netflix has to borrow in order to fund their ongoing operations and ambitions. Apple has a diversified portfolio of operations. The wearables alone are already a stand alone Fortune 200 sized company and growing.

What is Netflix going to do when all they have to offer is their own content? Their business model is going to be caught in a seismic shift. Because at the end of the day they are what they are; A One Trick Pony.

Reed Hastings will have an opportunity to show what he's made of because he's losing free cash flow with all of the current content being removed from his platform and being turned back on him and Netflix as competitors.

That's significantly more devastating than the ongoing China Trade War issues being imposed on Apple. At least that has the potential for positive result.
glssmrbl profile picture
@cuttysark8301

Very true. Which is why I have not owned Netflix stock in a long while.
Gary J is Rich on AMZN profile picture
@cuttysark8301

"What is Netflix going to do when all they have to offer is their own content? Their business model is going to be caught in a seismic shift. Because at the end of the day they are what they are; A One Trick Pony."

Oh I don't know, add a billion more subs while iPhone sells less and less iPhones?
LazyGringo profile picture
Netflix is in trouble. Without Disney, Warner-HBO and other content anymore they are caught in a vise, and heavily in debt. They can survive ok but the stock needs to come way down to be in the real world of PE's. Their days of high growth are over. AAPl though is about the safest best bet out there.
B
Summary: hold or add!
c
A very well reasoned and precise article. Thank you for taking the time.

In regard to a some comments posted, I'd like to make a few points: Until an Apple competitor has an ecosystem of 1.4 bazillion users, then STFU.

As far as Apple being only a hardware device company, that narrative is eroding faster than the American Buffalo did back in the day. Apple is transitioning into a highly valued "Services Company" that is the Only one that values Your Privacy and Doesn't monetize your personal data! How does one affix a multiple to that factoid? The iPhone is merely the gateway to that ecosystem. Not to predicate of revenue.

That makes this company unique and why Healthcare will be hitching themselves to Apple as the forerunner of medical data being controlled by the consumer through Apple, and Apple Alone!

Finally, their streaming service will attract those within the Ecosystem, and before I hear anymore noise about "Apple should have bought Netflix years ago", that model is about to be under siege from all points on the compass and Apple was smart to go their own way. Anyone notice how NBC just pulled "The Office" from Netlix? Because they are starting their own streaming platform just like Disney, Fox, etc.

Netflix will be the next company to experience what the American buffalo did as they will be left with just their original content after everyone else pulls their remaining content to open their own streaming platforms. Tim Cook and Apple saw that several years ago.

I'm very happy with having a generational Leader like Tim Cook who is doing what Steve Jobs did, keep this company growing and continue to be the stalwart envy of every other company on the planet. Apple has the best products, services, and wearables. Everyone else is a distant second!
glssmrbl profile picture
@cuttysark8301

Good points but Netflix's Reed Hastings also saw this shift which prompted the start of the expensive production business. The one attribute that people are missing with this narrative you've propagated is Netflix is still one of the few willing to generate subscription sales on a "non-adversting" platform.

Can you believe Hulu charges its customers $5.99 for an ad-supported viewing? Crunchyroll is charging its customers for ads too! I'm guessing Disney+ will bring their TV ads to their platform along with Fox. Why wouldn't Time Warner do the same when they release their service to compete?

Unless everyone is bringing ad-supported platforms pricing down to $0.99/month or less I don't think Netflix will be out of the fight just yet.
schizoidmantoo profile picture
Garmin makes a great watch if you are into outdoor activities like running, hiking, cycling, swimming, golf, etc. I have the cheaper Garmin 235 and even it does things that Apple watches cannot. (running stride length, cadence, Vo2max, lactate threshold). With the 935 you can go 2 weeks between battery charging, Apple is 2 days at best.
a
Think Apple buybacks and dividends! Also 5-G phone demand in 2020 likely to be huge! I predict many will finally give up their 4-G phone for a 5-G ! Granted this event won’t happen for several months!
j
Apple fanboy here, I won’t be updating for 5G I will upgrade when my XR is worn out in 3-4 years. 5g won’t do much for phones. They already have capable, reliable data streams. And it just doesn’t matter, Apple will continue selling 180 million+ devices a year for minimum a decade. That’s an easy $500,000,000,000 returned to shareholders. Long AAPL@164
glssmrbl profile picture
@jarsnice

Apple will be a future Consumer Staple and a Dividend Aristocrat! Imagine how much total returns you'd be sitting on when you're watching news reports on the possibility of moving Apple to the Aristocrat list.
m
mmoy
08 Jul. 2019
I was using a 2G phone after 4G came out. I upgraded to a 3G phone. 4G has far more bandwidth and capability than I need. I have an iPhone 7+ and I think that it's still good for another two or three years.
LazyGringo profile picture
After this and the next quarter, expect AAPL to fly again, and depending on guidance the stock may fly even sooner. With the big China worries out of the way, there is nothing stopping it now and tons of upgrades have been put off all over the world. I am looking for 250 within 9 months.
glssmrbl profile picture
@LazyGringo

A bit optimistic given all the hate over it's optimal blended multiple (services + hardware). I'd be happy with $220 in 9 months. No need to rush... We're still accumulating. :)
Code Talker Market Analysis profile picture
The big story soon will be the A/R headsets which will, IMHO, replace the iPhone like the iPhone replaced the iPod as the must-have product.
Eric Bradley profile picture
Later this century, we'll move to an embedded chip in our brain.
If you were a Star Trek fan - think the Borg: :You will assimilate"
Only we'll be doing it voluntarily.

Maybe humans will evolve into two distinct tribes: those with Apple chips & those with Android.

Can't wait for the play on the old Intel inside campaign - "Apple Inside"
:-)

Very long the stock
r
Apple is in good shape. Services continue to click and are a snowball rolling down hill in terms of increasing shareholder value. For iPhones it’s ALL about 5G. The next cycle is meh but Sept 2020 is Yuge! You will see long lines etc and this will propel the stock. Any other new products are gravy. 300 by early 2021. Yes I own it!
t
apple is printing money and that is without any new "hits". but what nobody talks about is just how successful their recent "failures" are. everybody mocked the watch. now it's the best selling watch in the world. everyone mocked the headphones as looking dumb. said too ugly to wear. now they are everywhere. and these are first gen versions. singles and doubles all add up. and suddenly, boom - a HR too.

it's an easy low risk buy and hold. and btw - it's near an all time high so not as if it's a laggard.
J
Exactly. It’s hard to bet against a team that is always playing with the bases loaded. Apple’s non-iPhone business is more than 5x larger than Netflix, close to 2x larger than FB, and almost as large as either Microsoft or Google. Besides that, they’re only a phone company with that iPhone thing...
Gary J is Rich on AMZN profile picture
@JP24

Too bad the market pays for growth prospects not 5x this and 2x that and decreasing iPhone sales.
davel profile picture
Actually no one really knows how successful the failed Watch is. Apple doesn’t provide any useful info.

We assume that the watch does well and Apple says it does well.

I am fine with that. As Apple can continue to sell however many watches they sell and continue to improve the product while gaining no competition to speak of.

Contrast this situation with the iPad, where they did publish units and sales and promptly had a flood of competition.

The same goes for the AirPods. This seems to be another successful failed product where we have no information.

These two products are the foundation for Apple’s iot initiatives.
d
FAANG BANGER
g
Absolutely 100 percent- LONG APPLE
glssmrbl profile picture
@greedisgood33

My 2nd largest holding. And I don't see that changing for several years.
davel profile picture
While services and mobile are showing good growth they only partially offset the decline in the phone.

As for China regardless of the minute by minute reality show headlines, expect trade frictions to be persistent at least until the election.
c
@ davel - really any evidence? Results are not pointing to that. Services are a 50 bill run rate and that is clearly making up the shortfall in profit from phones (services much higher profitable business). You could argue that with revenue but we are investors and profit is the only thing that matters. For the record Apple will make more profit this year than any other year and will be the largest in corporate history. Only to beat their own record. As a piece of advise read the balance and sheet and results rather than the media junk. Results are much better indication of the health of a company! I really can’t understand comments like yours when it’s so easy to see you are wrong but you are too lazy to check.
davel profile picture
@cryptowarrior

Yes. I look at the quarterly reports. While wearables and services grow nicely their change in revenue does not make up for the negative change from iPhone.

As for profit I believe that holds as well. What is increasing is eps, but that is manipulated as they keep buying shares decreasing the float, so the ratio looks good.

I know the bean counters tend to ignore the actual math part, but there you go.
g
Question:
What company became the first trillion dollar company?
r
If as TC has stated China has not affected Apple significantly then the upside is going to surprise the market which isn't a believer!
Kayode Omotosho profile picture
The issue with a stock like Apple is not the company. It's the valuation. If you're going to own this stock, you better have a big risk appetite.
Code Talker Market Analysis profile picture
Apple's forward 2019 PE is ~16.
Coke's forward 2019 PE is 24.58.
McDonald's forward 2019 PE is 25.
Amazon's forward 2019 PE is 70.
The Current S&P 500 PE Ratio: 22.25.

Which of these numbers is the lowest, @Kayode Omotosho ?
Kayode Omotosho profile picture
Your P/E is a function of your projected sales growth. iPhone sales are not projected to grow as fast as before. That's the reason for the depressed P/E
-eddie- profile picture
Wasn’t FAANG?
f
Different groupings. "FAAMG" replaces NFLX w/ MSFT.
f
Long AAPL!
esavela profile picture
I agree with some of you here on the subject that it's hard to get behind someone who touts a stock but doesn't have a position in it. If you're ambivalent that's a different matter. but if you really like a stock you should would think you'd have a piece of it. Just my opinion.
donzoab profile picture
It’s called INDEPENDENT ANALYSIS. So many amateurs on this thread. No position allows the analyst to state clearly their opinion without an agenda. Listen. Learn. Educate before posting.
Gary J is Rich on AMZN profile picture
@esavela

Roger Ebert never made a movie.
AlphaElephant profile picture
Why complain if someone has done work and developed insights that you can benefit from? If you believe the data, line of thinking and conclusion, what is the harm? Plus lots of aspiring investors are in studies or early in career and may not have the money to invest.

Finally, some people actually do research publish and look for community feedback BEFORE they establish a position, as opposed to publishing after they buy. I see far more credibility in the former.
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