Apple (AAPL) Changes Character
A Stock With Its Own Strategy for Making Money
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Apple (AAPL) Changes Character
What do you do when a stock changes character? Specifically, how do you handle it when a stock you’ve known as a growth stock may have turned into an income stock?
That’s exactly what I think has happened to AAPL, and it’s the reason people are having so much trouble deciding what to do with it. What follows is an expanded paraphrase of the answer I sent to several Cabot subscribers who asked what they should do with AAPL.
Apple was a monster stock from 2004 through the end of 2007, soaring from a split-adjusted 1.45 to 27. Then, after three years of gains with only one pullback as long as five months, AAPL dropped to 11.5 at the end of 2008. That’s a pretty good definition of a bad year. But, as everyone who didn’t buy it then knows, AAPL was off to the races again with another three-and-a-half-year rally, roaring to 101 by September 2012.
AAPL topped on February 24 at 133, nicked 133 on April 28, touched 133 again on May 22 and rallied strong to hit 133 again on July 20. That’s essentially a quadruple top over a period of five months. The stock’s decline has pulled it back to the price it was trading at in November 2014.
Any way you look at it, AAPL is a stock in a technical downtrend.
The Cabot subscribers I’ve talked to have asked the same question: Sell now or hold for long-term appreciation?
Here’s a summary of the main points I’ve made in trying to advise them.
- I don’t have an official position on the probability of Apple coming up with another transformative product that will push its stock higher. I’ve doubted the company’s ability to surprise me in the past and been proven wrong. So I’m officially agnostic about Apple’s product pipeline and the possibility that a dramatic move will drive AAPL higher again (Like buying Tesla or bringing out some kind of transformative streaming content service).
Ask yourself: why are you holding AAPL? If it’s a long-term holding that you intend to keep for the income (forward annual dividend yield is 1.7%) and possible price appreciation, then just hold on and forget about it.
If it’s a growth holding, then you should take profits in at least half of your position and draw a line in the sand where you will sell the rest. After all, the stock has been down nearly 14% from its highs, and hasn’t shown positive momentum since February.
- From a strict sell-rule perspective, AAPL has dropped below its 200-day moving average, and that’s traditionally considered the drop-dead line in the sand for growth stocks. Lots of people consider Apple somehow “special” or have emotional difficulties flushing such a long-term winner, or have a profit and don’t know how to handle such a circumstance.
- The other sell rule you might consider is, “Never let a stock take away more than half your profit.” If, for instance, you bought at 90 and had maximum profit (48% at 133), that rule would indicate that your drop-dead sell price should be around 112.
Keep in mind that AAPL is at the heart of an emotional tangle for investors. It was a big winner in the past, which makes it hard to sell. It’s also a stock that has staged more positive surprises than almost any other I can think of, and that also works against treating it like any other stock.
But at this point, AAPL is known by every growth investor and is probably held by just about every institutional investor who wants exposure to the U.S. market. It has a trailing P/E just over 13 and a forward P/E just under 12, so value investors should be sniffing around, too. It has proved that there were more sellers than buyers at 133. The real question is, are there more buyers than sellers at 115?
Personally, I think lightening up in your AAPL holding and watching what happens with the rest makes sense.
A Stock With Its Own Monkey-Making Plan
My stock recommendation today is a Chinese company you’ve probably heard of if you’ve spent any time at all nosing around emerging market stocks. The company is NetEase (NTES), one of China’s largest web portals that has its own strategy for making money.
NetEase operates a full-featured Chinese web portal with all the news, weather, sports, gossip, blogs, dating services, messaging, email, photo hosting and search. That makes it very similar to Sohu.com or Sina.com.
But the main source of revenue for NetEase is online games like World of Warcraft, plus a huge slate of games exclusively for Chinese audiences, including many developed in-house. The company enjoyed 26% revenue growth in 2014, and a very strong 55% growth in the first quarter. Earnings growth is estimated at 18% in 2015 and 23% in 2016. After-tax profit margins were a robust 38.9% in Q1. The stock also pays a 1% annual dividend.
I like NetEase because, more than just about any company I can think of, it has played the massive migration of the Chinese online experience to mobile devices to perfection. More Chinese now use their mobile devices as their primary internet access, and NetEase has optimized its games (and its Web portal and all other services) for mobile users.
If you’d like to learn more about Chinese companies like NetEase (as well as strong companies in all global emerging economies), you should check out my advisory—Cabot China & Emerging Markets Report—which tracks the strongest stocks in the fastest-growing countries in the world. Click here for more information.
Sincerely,
Paul Goodwin,
Chief Analyst, Cabot China & Emerging Markets Report
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