Should I Invest in Apple?
Posted in Trading on May 17th, 2017
Most likely, many may have missed the Apple boat, including myself. Even if you saw Forrest Gump in 1994 and invested back then, you would have to wait more than ten years before seeing significant growth in the shares. Apple announced earnings couple of weeks ago. The actuals were in line with estimates, with investor immediate reaction was slightly negative after hours. The stock bounced back and has been on a steady climb since the announcement.
Ten Reasons Why Apple Stock is Rising
By looking at the charts, we can see that $AAPL has continued on the path above the 200 day moving average. Besides dipping below in May of 2016, $AAPL has been reaching all time highs (ATH). It is now considered the largest U.S. company.
$AAPL Daily Chart with 50 day and 200 day moving averages
$AAPL Weekly Chart with 50 week and 200 week moving averages
Here is some ten positive news and actions taken by $AAPL:
- Cash on hand, or cash and cash equivalents have reached epic proportions. Fair value of $257 billion dollars. This is higher compared to GDP of some small countries. Or higher than the market cap of other technology companies.
- Board of directors announced increase of Capital Return Program (CRP) from $250 billion to $300 billion – 20% increase. This includes dividend payments, accelerated and open market stock repurchases, and taxes related to equity awards.
- Included in the increase of the CRP, quarterly dividends will be increased in the third quarter by 10.5% from $0.57 per share to $0.63 per share.
- Included in the increase of the CRP, share repurchases are authorized from $175 billion to $210 billion. This represents $35 billion out of the $50 billion increase in the CRP.
- Net sales have increased to almost $53 billion per quarter, increase of $2.5 billion from the previous year.
- iPhone sales have increased by 1% in revenue, year over year (YoY), probably due to higher average selling prices (ASPs) for the larger Plus phones. It is expected the new generation of iPhone will have higher ASPs at the end of 2017.
- Mac sales have increased by 14% in revenue YoY, despite lack up product updates on both the desktop and laptop lines.
- Services have increased by 18% in revenue YoY. This is the iTunes, AppleCare program, and Apply Pay services.
- Other products increased by 31% in revenue YoY. This includes iPod, Beats, Apple and third party accessories, and the Apple Watch.
- Index funds have become popular in recent years because they have been outperforming actively managed funds. Because $AAPL is the largest percentage of the S&P 500 index, as more money pours into these index funds, I believe the funds will have to purchase a larger amount of $AAPL stock to mimic the index.
I See Six Warning Signs
Here are some reasons why I am cautious about $AAPL at this time. Entry signals are tricky. One may just want to buy the stock because it is hot. It seems to go up every week, and so it is hard to know if it will drop back down for a dip buy. Trend following strategy of $AAPL would have shown an entry signal years ago. Using the 200 day moving average as part of the strategy, the signal would have come last year. As a momentum investor, the entry signals may have come every time it broke through a resistance level. We emphasize that rules are more important than entry signals. Whatever your strategy is, you have to know when to get out, either taking small losses or preserving gains with stops.
Here are six potential warning signs:
- There are many smart people in wall street and hedge funds that think the U.S. stock market is overvalued. Some are placing bets that there will be decline. Even $AAPL was not immune to the decline during the 2007-2008 financial crisis.
- Revenues may have increased on iPhone, but the unit sales have decreased. Probably due to people waiting to upgrade until the next generation iPhone is introduced. We shouldn’t expect increased iPhone unit sales for next couple of quarters.
- iPad revenue has decreased by 12% year over year, with unit sales decreasing by 13%. This is probably symptomatic of the overall tablet sales worldwide, but there is no longer any growth by Apple in this space.
- While Apple has grown in revenue in most regions, we believe China is a crucial market. This may be symptomatic of slowing growth in China. Any further decline in China revenue may cause lower revenue quarter over quarter. If China sneezes, everyone may catch a cold.
- In order to pay for part of the CRP, $AAPL issued commercial paper and long-term bonds. $AAPL have increased their long term liabilities to $84 billion.
- Although the cash and cash equivalents is very large, $AAPL has decided to put a large portion into corporate securities, mutual funds, and US treasuries. In recent months, there are unrealized losses in all three, while some are offset by unrealized gains. If interest rates rise, the treasuries may be valued less. If another economic crisis occurs, corporate securities risk losing in value quickly. Same goes for mutual funds. While it is hard to analyze with the categories given, the cash equivalents are not diversified in our opinion.
So, should I buy Apple stock now? It depends. As a trend follower, the entry point is not good, but I would buy a small amount of shares, keeping a tight stop, and risking about one to two percent of overall investment portfolio. There would be a better entry on the pullback towards the 50 day moving average. If I was a value investor, the stock seems a bit expensive with P/E over 18, in which case I would move on to a better value play. There are so many stocks that I can find. Even the best value investor like Warren Buffet and Charlie Munger have missed on several tech companies.
So far the prospects for Apple’s future hasn’t changed in the near future. Apple has great potential to offer amazing things. Even though many criticize on its lack of innovation, it can command dominance in different categories. After dropping “Computers” from its brand, Apple has proven to redefine itself. Maybe they will change again, adding more growth. Or maybe they will just take their cash and fly away in their spaceship.
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