I know that many of you would want a few words about what is going on in Israel. Let me save that for later. First, let me turn to Apple (AAPL). Technology earnings are coming up and there are a few points I want to touch upon as we approach those announcements.
A Little History
I bought Apple for myself, clients, and family originally on or about January 27, 2005, for approximately $1.29 per share. Of course, there were additional purchases over time as new clients came on board, or we rolled out new strategies at later dates. AAPL has proven to be my most successful personal investment since I first bought Philadelphia Electric around 1980 when I was in college. I have some residual of Peco in its current form Exelon (EXC). But as I am about to explain, you can’t hold everything forever and expect that past results will continue in the future. EXC paid for a new kitchen in our New Jersey home and a new (bigger) engagement ring for my wife. I have begun to pare down AAPL in the past year and barring any major pronouncements when the company soon reports earnings, will continue to do so.
The Cash Cow of All Time
Without a doubt, AAPL is the cash cow of all time, generating tens of billions of dollars in free cash flow per year. In fact, it may continue to do so in the future, albeit at a lesser rate. AAPL needs to increase its dividend while still maintaining a huge buyback program. Unless the company does the former, with T-bills yielding around 5.5% and AAPL yielding a dividend of 0.55%, a large proportion of investors just won’t be attracted to AAPL as it was when the stock yielded around 2% and T-Bills were ¼%. A raise of the dividend to 3% will have to be taken out of the stock buyback, creating a double-edged sword for the company.
Where’s the Growth?
AAPL can no longer grow revenues via iPhone, iPad, Macs, and other gadget upgrades. The market around the world, apart from India is saturated. However, market share in China is at risk. Sky-high costs for iPhone upgrades in a hyperinflationary environment around the world are forcing people to hold their old iPhones for longer periods of time or switch to Samsung products. Revenue grew by 7.79% in 2022 and is projected to decline (that’s right decline) by 3% in 2023 before rising 6% in 2024. Earnings per share was $6.11 in 2022, is expected to dip by a nickel per share in 2023 before rising to $6.56 per share in 2024. Still on a one-year basis, that’s an 8.25% rise in earnings in 2024 which is nothing to write home about.
Tech Growth or Retail?
The stock sells at 7.2 times current year’s revenues and 29 times projected 2023 earnings. That implies that the PEG ratio (Price to Earnings over Growth) which is a key metric; is way north of 2, which is the benchmark that a growth manager would pay for a stock. IN AAPL case they bent that rule of thumb over the past few years, but don’t expect so in the future. In many respects, AAPL is priced like a retail stock and for the most part is a retail company.
In all fairness, AAPL revenue growth is coming from services rather than hardware, but it has a long way to go. Apple has been quiet on the subject of AI. To succeed it will have to make huge inroads into AI. Unless you just climbed out from under a rock, AI is the technological wave of the future, not handheld devices. Microsoft (MSFT) which had to reinvent itself, is now a leader in AI and its market cap which was once dwarfed by AAPL is $2.45 trillion compared to AAPL’s $2.75 trillion. Expect that gap to close.
Don’t Fall into the IBM or GE Trap
I hear from many people that AAPL is a stock that you can’t sell and must hold forever weathering its ups and downs. I heard the same about International Business Machines (IBM) and General Electric (GE).
Here is a chart of IBM going back to 1991:
Chart source: Telemet
As you can see, IBM has been wandering in the wilderness since 1999 (the height of the dot-com tech bubble). That’s nearly a quarter of a century.
In case you did not know, GE was on the precipice of bankruptcy just a mere two years ago. Many long-term holders of GE saw their fortunes wiped out. Yes, there is a “new” GE but that is a totally different animal.
Am I saying that AAPL could be the next IBM? Yes, it could. What hurt IBM was a combination of complacency and lack of innovation. General Electric is a totally different story; one of financial mismanagement.
If you ask me, I would be a better buyer right here and now for IBM than AAPL as IBM is focusing on new products, services, and technologies, making that the first such innovative evolution since the personal computer.
What To Do Now As Investors?
I would not divest all AAPL, but you must pare down your holdings of AAPL. I am doing so but must factor in timing and taxes. Still, the Growth portfolio weighting of AAPL is now about 12.8% versus about 18.6% at the end of 2022. In all fairness, the price of AAPL is up about 35% from the end of 2022 while the performance of the portfolio is approximately up 44.5% for the year, after all fees. The S&P 500 (SPX) is up about 12.4% on a price basis in 2023 and the Nasdaq 100 (NDX) is higher by 36.28% in 2023 for comparative purposes. Going forward, I expect that AAPL will continue to underperform those indexes, both of which AAPL is the largest component. There are so many better and less pricey growth opportunities out there than AAPL, many of which we have found and are redirecting capital to.
I want to thank everyone who has reached out to Carly and myself with their concerns over our personal matters in Israel after the egregious attack on October 7. We have been in touch with my niece, cousins and friends who are there and thankfully all are safe. Carly has been part of an exchange program between Las Vegas and Israel. Many of her friends were called back to active duty in the IDF (Israeli Defense Forces). She has spent the last two weeks helping to raise money for their IDF unit(s). I have some very strong feelings as to what has occurred, especially being a 9-11 victim and member of a family of which lost many in the holocaust. However, I will keep my harshest criticisms of the war with Hamas off the pages of my commentary. I won’t hold back if we talk in private.
One thing that keeps my anxiety in check, is thinking of what Emily Litella would say at a time like this. Emily Litella was a character on Saturday Night Live (SNL) portrayed by the late Gilda Radner. Emily would always use malapropisms to make a point about current events. I keep on thinking that now she would say something like “What is all that I hear about the war on hummus. Hummus is a healthy food.” Then Chevy Chase would say “Hamas not Hummus,” To which Litella would say “Never mind.” Below is a classic Emily Litella segment. Peace out.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC was long AAPL, EXC, IBM, MSFT, QQQ, QLD, TQQQ, SPY, SSO & SPXL- although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high net worth private wealth management. LVAM is affiliated with Kingswood Wealth Advisors Services, a registered investment advisor. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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