Apple (AAPL)—Buy, Hold or Sell?
What’s the Next Apple?
It Might be Facebook
Last week, Apple presented the bad news that iPhone sales growth has been slowing, and the stock gapped down in response. AAPL is now 29% off last year’s high (hit in April), and more and more investors are wondering what they should do with Apple—buy, hold or sell.
I’ll answer that question below, but first I want to review a column that I wrote back in July, titled, “Sell Apple.” You can read the original here.
Back then, when the stock was selling at 120, my main point was that Apple was the most widely respected and most valuable company in the world, but that its relative performance (RP) line, which depicts how the stock is performing relative to the market, was showing a definite lack of enthusiasm among investors.
Here’s the chart I showed then.
The problem that comes when you’re the most widely respected and widely owned company in the world is that when existing shareholders try to sell your stock, there’s no one left to buy!
To create demand, sellers need to lower their asking price, and that’s what’s been happening with AAPL, over and over and over.
I saw it happen with IBM beginning in 1987. I saw it happen with Microsoft (MSFT) beginning in 2000. And now I see it happening with Apple as well.
Now, some value analysts will claim that Apple is a value stock here, and maybe that’s true. Its P/E ratio of 10 does look low. But that doesn’t mean it can’t get lower!
As I wrote back in July, once IBM stock began its downward trek from the world’s favorite stock to a has-been, it took six years to complete that journey. At the end, it had lost 77% of its value!
For Microsoft the numbers were similar. The downtrend lasted nine years (!) and took the stock down 72%!
If Apple were to fall 75% (the average of those two) from its high, how low would it go? I hate to even print this, because the number is so very low, but the answer is 34!
Fundamentally, from today’s perspective, such a low price for Apple stock looks fairly ridiculous. But a few of the things I’ve learned in my decades in this business tell me it’s actually quite possible.
1. Trends go further and last longer than originally expected.
2. The unexpected happens frequently.
3. It pays to be contrary.
So, humor me for a minute. Can you construct a scenario under which AAPL might trade at a price of 34 at the climactic selling point of the next bear market? (That’s when both IBM and MSFT bottomed.)
Imagine that China’s technological capabilities continue to grow while costs shrink. Imagine that margins at Apple keep shrinking. Imagine that tax laws change so Apple has to pay taxes on the $181 billion it’s parked offshore. Imagine that competition in the music and video space is cutthroat. Imagine that the company’s automotive project is a bust. Imagine that the best engineers defect to younger, more progressive employers (it’s already happening). Imagine (easily) that the company fails to attract a leader as visionary and charismatic as Steve Jobs.
I’m not saying that all these scenarios will play out, but with a little thought, it’s not difficult to see that there are many ways in which Apple can lose both market share and profits in its various markets.
Thus, having thought it through once again, and noting the continuing downward trend of the stock, my advice remains the same. Sell Apple.
And then invest in the next Apple.
The Next Apple
To find the next Apple, you want a company that is growing fast, that has excellent growth potential, that has high profit margins, that has visionary leadership and that has high barriers to entry.
Last but not least, you want a company whose stock demonstrates growing sponsorship by investors, who are consistently increasing their opinion of the stock.
The obvious one to consider today is:
Everyone knows Facebook, or at least they think they do.
But Facebook is much more than the world’s largest social network.
It’s also Instagram, Messenger, Face.com, WhatsApp, Oculus VR and more, all of which have great growth potential.
And last week’s earnings report by the company was magnificent.
Revenues were up 52%, while earnings soared 46%, blowing away the expectations of most observers. In response, investors flooded into the stock, gapping it up on more than double average volume, and then pushing it out to record highs on Friday.
Looking ahead, analysts (generally conservative) now see Facebook growing earnings 36% in 2016 and 32% in 2017.
So, investors in general are increasing their perceptions of FB, and as a result, they’re buying the stock. And this stock is still fairly young; it only came public in 2012, so (unlike AAPL) there are still many more possible buyers than sellers.
Which to me says that Facebook is quite possibly the next Apple.
So, you could simply jump into FB right now (maybe after selling some AAPL). But what I really suggest is that you become a regular reader of my Cabot Stock of the Month. I originally recommended FB to my readers back in July, and they’re now looking at profits of 15%. Plus they continue to get updates on FB every week.
Not only that, but they get comprehensive advice on building a balanced portfolio composed of the best stocks from the wide range of other Cabot advisories.
Right now, for instance, Cabot Stock of the Month has a fourth of its portfolio in momentum stocks, a fourth in growth stocks, three-eighths in value stocks and one-eighth in dividend stocks (note that there’s some overlap between categories.)
Last but not least, last week I added a brand new value stock to the portfolio. It’s a well-known American company that’s selling very cheaply today. It pays a dividend of 4.9% and I think it has great potential for the years ahead.
To get the name of this stock, along with continuing advice on building a high-performing and balanced portfolio, click here.
Yours in pursuit of wisdom and wealth,
Chief Analyst of Cabot Stock of the Month
Publisher, Cabot Wealth Advisory