One of the more ironic phenomenons in the investment markets is that as you get more successful, you may have to trim back on that success. Such may be the case with Apple Inc. (Nasdaq: AAPL).
With spectacular earnings results, Apple is on another fantastic run, climbing 9% just this morning, trading recently around $610 per share, up more than 40% this year alone. But this means Apple investors around the world are seeing the shares in climb as a percentage of portfolio holdings. For those investors who are big in Apple, it might be time to think about re-balancing their portfolios, taking some profits in Apple.
What's driving Apple's run? Profits. Apple once again blew away earnings estimates. The company last night announced a quarterly net profit of $11.6 billion on revenue of $39.2 billion. That compares with revenue of $24.7 billion and net profit of $6 billion, or $6.40 per diluted share, in the year-ago quarter. Gross margin was 47.4% compared to 41.4% in the year-ago quarter. These growth numbers are shockingly large.
Apple's run has been so spectacular that it is now exerting an outsized influence on everything. It is exerting a big influence on the S&P 500 Index, which is market-weighted, meaning Apple's influence grows as its price grows. As I wrote here, if you subtract Apple's earnings growth in the fourth quarter, S&P 500 earnings growth was actually negative.
Apple's Amazing Run
Does your porfolio look like Apple? If so, it may be time to cash in some of the profits in a rebalancing.
The same thing is happening in the IU25 Index, which has Apple as one of its largest holdings. You see, Apple Inc. is the largest holding in the index because the index is market-cap weighted, meaning that as a stock grows in market cap it exerts more influence on the index as a whole. This is a paradox for success for the IU25 as well: Apple has contributed immensely to our spectacular run, but now we may be in a situation in which the IU25's future is too Apple-dependent.
While we are proud of the spectacular performance of our index, we must admit much of it is due to Apple and Priceline. If you take those two components out, our Index would be underperforming the S&P 500, rather than outperforming it. Just one stock makes a big difference -- because it's Apple.
According to the IU value formula, which is why Apple was selected to our index, it's still not an expensive stock -- Apple's forward price/earnings ratio (12) is well below its substantial earnings and revenue growth rate, which has been more than 50% year-over-year! That is remarkable growth for a company with more than $100 billion in revenue. It has a P/E/growth (PEG) ratio of .65, which is low.
So while technically Apple is not that risky of a stock because it has a reasonable valuation in a great balance sheet, investors need to look at how much they are willing to own. The volatility has been increasing in Apple. Just in the last two weeks it has experienced dramatic swings exceeding 10% (both up and down).
Most finance textbooks recommend holding no more than 10% of a stock. Of course, people shun this rule all the time. I have a good friend who works in the financial services industry who tells me stories of taking orders from people who put 100% of their net worth in one stock -- sometimes Apple -- and "let it ride." This usually has one of two extreme results: Incredibly good or incredibly bad. According to star fund manager and investment author Joel Greenblatt, holding eight stocks eliminates 81% of the risk in owning one stock, and holding thirty-two stocks eliminates 96% of the risk.
But what if your Apple holdings have gotten even larger than 20%?
I believe the 20% number is a good number for the maximum investors might consider holding in one stock. If your holdings in one stock are more than 20%, it's likely that one stock will control your destiny as an investor. Investors who were lucky enough to be concentrated in Apple -- especially those at or above the 20% level -- might think about taking some of that money off the table and diversifying. After all, it's now free money, you earned it. Maybe it's time to move it to a different place and rebalance the portfolio to reduce the outsized influence Apple is starting to have on the market and your portfolio.
Sure. Apple was at 4.2% of the S&P 500 yesterday. Financial Times had a great summary of it. You are correct that they are likely to rebalance soon, but so far this year Apple has had an outsized influence on the index and no rebalancing has been announced.
From the FT article:
"It accounts for 4.2 per cent of the S&P 500 and more than a fifth of the S&P's tech sector. Its plans to pay a dividend have made it a widely held stock. Without Apple, the S&P 500's gain of 9.1 per cent so far this year would be around a more modest 8 per cent.
Not since 1999, when Microsoft contributed 14 per cent of a 10 per cent rally in the S&P 500, has a group exerted such influence over the market. Apple's weighting in the S&P has rarely been achieved, let alone held, for long. ExxonMobil was the last group to have such sway, in April 2008."
Both the S&P and Nasdaq will have to continually monitor Apple's growth and potentially rebalance. What I'm saying is you are an individual investor you have a chance to get out in front of this!
Yeah I love it when people complain about capital gains ... like you said it's better than losing money. I know a lot of people who refused to sell tech stocks in 2000 "because of the capital gains." A few years later, they were looking at losses, they no longer had gains to book.
I never have a problem paying capital gains taxes cause it means I made money rather than lost it.
what "can't" Apple do? It seems as though the have a magic wand over there to conjure the latest and greatest products. Their continued success is truly amazing
@icebreaker 1975
I am not very sure whether Apple can continue this unbelievable run in the long term. They are still riding on their products introduced with Steve Jobs's influence. By next year we will get to see what the new management had been able to do. Customer loyalty might seem like it is sustainable but you can never guarantee it. If a shiny new toy comes along replacing the iPhone and iPad just like Apple did to its competitors they might just run out of luck.
If you pay attention to the latest development, actually it is easy to see cracks on Apple's foundation:
1. Both AT&T and Verizon started to push away iPhone as their premium phone due to the hefty price Apple charges against them. Two years ago, these carriers are begging for what ever Apple will throw at them. Now the situation changes. I won't surprised to see margin compression during next quarter
2. Even iPhone/iPad show strong momentum last quarter, their sale are slowing down recently in US. This quarter is saved by the sale in Chinese new Year . The momentum of China market is usually 6-12 month dragging behind US for mobile device.
3. We haven't seen any innovative product from Apple for two years. If there is nothing big in Apple's product pipeline for another year, something will happen.
I don't believe Apple can prosper for an extended period of time without delivering new revolutionary product. Let's wait and see.
While I agree with many of your thoughts, I think the push away by AT&T and Verizon may well backfire on them. Verizon said 50% of the new lines it sold were for Iphone- therefore we will embrace the Windows phone for higher margins. In this business I thionk you need to listen to your customers. Trying to push them into something they don't want will never suceed. The LTE iPhone should give Apple plenty more running room in the US before they hit the wall.
It's only logical that Verizon Wireless iPhone sales will be lower this year. Verizon started selling iPhones in Feb. 2011. So there was an initial surge of sales from 1) new customers and 2) existing customers who were either eligible for an upgrade or so eager to get an iPhone that they paid the higher price for the phone.
There was a lot of pent up demand for iPhones among Verizon Wireless customers. Now a large chunk of that demand is satisfied, and the 4S is not earth shattering enough to make someone who bought a phone in February buy a new one before he is eligible for an upgrade.
A lot of Verizon customers will keep the iPhones they have until the contract expires. And since most customers have two-year plans, I suspect iPhone sales at Verizon will only rebound significantly starting in the 1st quarter next year.
In this business I thionk you need to listen to your customers.
@Tokyogai, is it Steve Jobs' motto: Consumers doesn't know what they want, you need to teach them what they want...
As an investor, the future trend is more useful than current trend. I do see many technical nerds start to drop the iPhone and switch to Android, for various reasons. That is the reason why Samsung alone sold more smartphones than Apple.
@minvestor, to be honest, I can not pinpoint when it will happen. But if there is nothing big from Apple for another year, I am positive it will happen. Many investor jumped into Apple stock after quarterly report, it reminds me what happened to RIMM in 2010. People saw the storm was coming after iPhone & Driod, but RIMM's momentum continued longer than most people can foretell.
But I would rather be wrong about Apple, and hope it does bring something big to the consumers in the next 12 months.
I just don't see what leverage the carriers have against Apple. The consumers really want the product. As Tim Cook said, they get paid back on the subsidy in 24 months. What's their negotiating position?
"Fine we won't carry the iPhone!"
Good luck with that. If that's their position, they are saying they are willing to reject the most popular consumer product on earth to attempt to re-negotiate the subsidy. I have a hard time seeing that happen. It would be like a car dealer saying, "Well, theses cars, I dunno if we make money on them. Let's stop selling them. We'll just sell trucks."
The alternative I think those carriers can and willing to try is reduce subsidy. Meaning the consumers will have to pay a little bit more for the phone.
Even that, I don't think every carrier will apply the same policy.
First of all, it is arguable that iPhone is better than top notch Android phones, thus I don't see iPhone is a must have unless you are die hard Apple fun. Time changes, it is not 2009. That is the reason AT&T and Verizon dare to challenge Apple.
Secondly, Verizon has successfully promoted Android platform to nowhere to be the no.1 platform in less than 3 years. I doubt Verizon's new move to promote Windows phone, but I would not totally discredit Verizon at this early stage.
I had a meeting in Greenwich, CT the other day and got there a little early to run an errand first on Greenwich Avenue, the main shopping street. Still killing time, I went into the Apple store for a quick minute.
I kid you not, it was 11:30 am on a weekday and there were 100 people in that store! Two things jumped out at me: First, the roving salespeople were busy, busy, busy. Some of them had "lines" two or three deep of people seemingly BEGGING to buy phones and iPads. The second thing was that the "consultant" tables in the back were incredibly busy. It looked like a college library in there, with computers, customers, and their young "genius" helpers tutoring them.
I overheard one woman trying to learn how to create and organize files for her knitting patterns. Now, WHO in 2012 doesn't know how to create a file? But that helper was working with her as respectfully as if they were putting their heads together to create the next killer app.
It struck me that what Apple sells SO brilliantly is the feeling that YOU are the master of technology, rather than IT mastering you. That will NEVER go out of style!
It's the same at Grand Central Terminal in Manhattan, @Street Smart. Ten years ago, people waiting on a train crowded into a bar. Now they crowd around the genius bar.
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