Sell Apple

Sell Apple (AAPL)

The Peak of Perception

This Stock Has More Potential Buyers than Sellers

Sell Apple

I’ve been an Apple (AAPL) customer since 1987, when I bought Cabot’s first computer, a Macintosh SE. (It had a 9” diagonal black and white screen, an 8 MHz processor, 1 MB of RAM and dual floppy disk drives. The price was $2,900.)

In the decades since, I’ve bought many more. In fact, I have a stack of old Apple laptops that I haven’t been able to give up yet.

mac

Today, I’m writing on a MacBook Pro. This morning I did my morning crossword puzzle on my iPad. All day long, my iPhone is by my side. My home Wi-Fi comes from Apple AirPorts. And some nights, I stream entertainment through my Apple TV.

In short, I love Apple products, and I expect to continue using them for many more years.

But one of the most important market truisms is this:

“The company is not the stock.”

So today I’m going to give you some long-term perspective on Apple—both the company and the stock—to help you see why it might be a good idea to start selling some Apple shares here.

To start, we go back to International Business Machines (IBM), better known as IBM.

When all computers were room-sized monoliths and few people imagined the future could be any different, IBM was the king of the hill.

In fact, Ken Olsen, founder of Digital Equipment Corporation, one of IBM’s competitors, famously said in 1977, “There is no reason anyone would want a computer in their home.”

Yet in 1986, a little company named Microsoft (MSFT) came public, and soon proved Ken Olsen very, very wrong.

And what happened to IBM?

Its stock fell (slowly, over six years) from 44 to nearly 10, for a loss of 77%.

And the reason was not that IBM was dying, or that earnings were plummeting. In fact, IBM’s peak earnings of the period came in 1991.

No, the reason that IBM stock lost 77% of its value is that investors’ perceptions changed!

Before Microsoft came along, IBM was the unquestioned leader of the computing world, and no one could see a future that was different.

But once Bill Gates began to get manufacturers of desktop computers to standardize on DOS software, investors began to perceive—slowly at first and then faster—that life would be more difficult for IBM in the future.

So as these investors lightened up on IBM, they bought MSFT—month after month after month.

Investors who bought MSFT in those early years and stuck with it all the way to the 2000 market top did extremely well, as the stock climbed from less than 1 (split adjusted) to nearly 54. If you bought anywhere in the late 1980s and held to the 2000 top, you made more than 17,000%!

At the 2000 market top, MSFT was one of the kings of the hill.

But since 2000, what has MSFT done?

It’s lagged the market consistently. After peaking at 54, it bottomed at 15 (a loss of 72%), and it’s still well behind its old high of 15 years ago.

The problem isn’t that Microsoft has stopped growing; the company’s earnings have grown almost every year since 2,000, and they’re expected to grow 6% in the current fiscal year and 14% in the next. Plus it pays a tidy dividend that yields 2.7%.

The problem—once again—is that investor’s perceptions changed, not least because a competitor came along that captivated both the pocketbooks and hearts of consumers and investors.

That company, of course—the new king of the hill—is Apple.

Apple is not only the most valuable company in the world today, it’s also one of the most loved, thanks to the bonds people have built with their Apple devices.

But as I said above, it’s important to remember that the company is not the stock.

I have little doubt that Apple will continue to design and market wonderful products, and that I, along with millions of people all over the world, will continue to buy them.

And I have little doubt that Apple will continue to grow its earnings for many years to come.

But I do believe it’s time to point out that Apple is at risk of enjoying its moment of peak popularity among investors, just as IBM did in 1987 and MSFT did in 2000.

Four Signs That Apple is Topping

Sign one is that almost no one today thinks that owning AAPL is a bad thing. Apple, which currently pays a dividend of 1.6%, is owned by just about every possible investor who could own it. That’s good, but it means that if current shareholders want to sell, there’s a lack of buyers to absorb those shares.

Sign two is the stock’s long-term chart, which, following the 2000 peak and big correction experienced by every technology stock, shows three distinct waves of upward movement, each one less powerful than the last. The first took the stock from 1 (split-adjusted) to 29, for a gain of 2,800%. The second took the stock from 11 to 111, for a gain of 1,000%. And the third took the stock from 55 to 132, for a gain of 140%.

rpline

Sign three is the stock’s RP line, which reveals that AAPL has actually underperformed the market since that mid-2012 peak. Technically, that’s quite revealing.

Sign four is what happened last week. Apple announced earnings growth of 45% vs. the prior year, which on the surface looks great. But the stock sold off heavily in reaction, with the gap down—from strong resistance at 132—signaling disappointment by some big investors. (Remember what I wrote above about a lack of appetite for shares?)

But what about the fundamentals?

You can dig all you want into the numbers in that earnings report—see how many iPhones Apple sold here and in China, try to figure out how many Apple Watches the company sold, and what the trends are there—even speculate about whether Apple is working on developing a television or a self-driving car or whether it should use some of its massive $194 billion in cash to buy Tesla Motors (TSLA), which the market currently values at $33 billion.

But such in-the-weeds fundamental analysis is not my way. To me, it’s more useful to listen to the stock. After all, the stock knows all, because it reflects the combined opinions of all the people—many of them smarter than me—who have already thought about all those fundamental factors. And to me, their opinions, revealed by the technical signs mentioned above, suggest to me that it’s highly likely that Apple is now passing the point of peak sentiment.

Which means there’s the potential for a big correction in the years ahead, a correction, if it follows the model of IBM and MSFT, could take AAPL down more than 70%!

Yes, I know it’s very hard to believe today.

But I do think it’s worth thinking about—because it’s your money!

To be clear, I’m not saying you should sell AAPL today or that AAPL is going to crash immediately. I’m talking about some long-term processes here. It takes a long time for investors to change their opinions about a stock, and it takes a long time to move five billion shares of stock.

But I am 100% certain that AAPL will not remain king of the hill forever; no company does.

And I think now is a good time to start lightening up on your AAPL shares.

Note: After IBM’s 77% decline, which took six years, it took another four years for IBM to get back to its old high. And since Microsoft’s 72% decline, which took nine years, it’s been six more years, and MSFT has still not exceeded its old high.

As for how to sell, that’s academic. Use trailing stops. Sell portions on a regular schedule. Do whatever works for your portfolio, remembering that your goal is to always have your funds invested in the stocks with the most suitable risk/reward profile for your portfolio.

Now, there is one very interesting question that should come to mind at this point, and it’s this: “Who will be the next king of the hill?”

Will it be Google? A Chinese Internet company? Or something outside the computer industry! A solar-power company? Tesla Motors? Mobileye? GoPro? Amazon.com? I can make arguments for all of them, but in truth, no one knows. The future is unwritten.

But you don’t need to see the future to be a successful investor. You just need to follow a proven system, and let your winners run. When you do, you’ll have a good chance of piling up triple-digit profits in the next Apple, whatever it is.

Moving on to the market, here’s what I see.

Market breadth remains poor. Natural resource stocks stink so badly that there’s got to be a bottom here somewhere (though I’m not brave enough or foolish enough to try to pick it). And growth stocks are flying, breaking out of multi-month bases and soaring to new highs.

For growth-oriented investors, it’s the most favorable market of the past 18 months!

So if growth is your preferred method of investing, this is no time to be sitting on your hands!

And if you’re like me, your preferred growth stocks are those that are not yet well known, simply because (unlike with AAPL) there are far more potential buyers than sellers!

Right now, one stock on my radar is Fitbit (FIT), a stock that recently earned a spot in Cabot Top Ten Trader. Here’s what growth stock guru Mike Cintolo wrote about it last week.

Fitbit (FIT)

    “A maker of wearable fitness-tracking devices that monitor your activity, exercise, food, weight and sleep, FIT ran up 48% in its first day of trading (on June 18) and has scarcely slowed since. The company is clearly capitalizing on investors’ thirst for wearable technology, but its astonishing growth is what has kept it hot since its smash debut. Fitbit’s revenues increased 175% in 2014, and were up another 209% in the first quarter of this year. Meanwhile, the company turned its first profit last year, and expects to do so again in each of the next two years. That kind of demonstrated growth in a red-hot industry always gets Wall Street’s attention; it’s why Deutsche Bank, Stifel and SunTrust Robinson Humphrey have all initiated coverage on the stock with buy ratings. The fitness band market is likely in its early stages and Fitbit holds a 67% market share, making it far and away the best pure play on the burgeoning industry. Next month’s earnings report will be the company’s first real litmus test since coming public. Until then, Fitbit’s honeymoon appears far from over.”

Plus, looking back at my example of IBM, Microsoft and Apple as consecutive kings of the hill in the computing industry, there’s a decent case to be made for Fitbit to be next!

The one clear trend of the decades—aside from computers getting smaller, faster and cheaper—is that computers keep getting more personal. The Apple Watch is Apple’s latest and most personal device and Fitbit is the new kid on the block, with unlimited potential if its managers make the right moves.

And its stock recently broke out to new highs!

fit

So, you could simply jump into FIT somewhere around here—perhaps on the next normal correction—and hope for the best.

But a wiser course would be to become a regular reader of Cabot Top Ten Trader, so you can not only get Mike Cintolo’s updated opinion on the stock but also keep on top of all the high-potential momentum stocks he’s following. It’s a great place to find the next AAPL!

For details, click here.

Yours in pursuit of wisdom and wealth,

Tim Lutts,

Cabot President and Chief Analyst, Cabot Stock of the Month

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