Apple in early 2016 – From market darling to “It’s not you, it’s me.”February 3, 2016
If you’ve ever watched Shark Tank, you’re familiar with the phrase, “I’m a customer, but not an investor.” It’s basically the business equivalent of the “It’s not you, it’s me,” relationship breakup rationale. Essentially, you like this person or product enough to let it play a small part in your life, but it’s not appealing enough to warrant any kind of significant commitment or attention from your end. The sentiment is analogous to Jerry Seinfeld’s classic observation on the appeal of email replacing phone conversations, because sending emails lets you keep relationships with people when you only want to hear your own side of the story.
Throughout most of the market run-up beginning in 2009, Apple had led the charge, beating earnings forecasts quarter after quarter. In reviewing our growth managers each quarter for write-ups, it wasn’t a stretch to check a manager’s performance vs. their benchmark and attribute it to either an overweight or underweight to this particular stock. If a long-only equity manager outperformed, they usually had an overweight to Apple, and vice versa. It really was almost that simple. When the stock reached a 10% constitution in the cap-weighted Russell 1000 Growth Index, some growth managers with “disciplined” investment processes put out memos announcing that they had revised their maximum position limit upward, as holding a maximum of say 8% of Apple was an underweight relative to the benchmark and thus a source of underperformance unless modified. Value-oriented managers weren’t immune to Apple fever either, as those with investment processes mandating minimum yields all but openly begged and pleaded for Apple to christen the market by announcing its first dividend, thus making it eligible for purchase. To say that AAPL was the market darling was a gross understatement, and it persisted for years. In fact, the stock proved naysayers and skeptics wrong at almost every turn. Founder and icon Steve Jobs passes away? No problem for AAPL. Samsung fights tooth and nail in a drag-out patent fight spanning years? No problem, apparently. I’ll admit to being one of those skeptics who had sold out of AAPL at around $90 per share…the first time, before the split (from that standpoint, it was a generally mortifying experience to watch the share price tick ever-upward, and then write about it every three months for every approved growth manager on our platform).
Flash forward to 2015-2016: The “FANG” stocks (Facebook, Amazon, Netflix, Google) carried the top-heavy market through turbulent twists and turns while Apple has languished due to heightening competition and shortening product lifecycles, and factors such as the Apple Watch and Apple TV not catching fire in the manner as the flagship iPhone, or the flop that was Apple Maps. Five years ago in the early upswing stage of the coming bull market, who in the world would’ve ever guessed that the “A” in the FANG acronym didn’t stand for Apple? Furthermore, reports today are much more tempered than the reports of infinite horizons just a few short years ago. Morningstar.com Sector Director, Brian Colello, grades Apple as having a narrow economic moat in his 1/27/16 investment thesis. Narrow! For the firm that had seemingly secured a stranglehold on the burgeoning smart device market and had its patents upheld in back-and-forth litigation with archrival Samsung, analysis in reports such as the aforementioned Morningstar thesis cites “Apple’s first-mover advantage may be diminishing,” or “minimal switching costs associated with smartphones.”
While the longer-term narrative remains to be written, one can safely say that the most recent chapter in the story of AAPL has dropped a plot twist that few analysts could have predicted – even the seemingly invincible Apple, as revolutionary and profitable of a firm as we’ve ever seen, may have finally succumbed to the adoption curve.
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This blog post was written by Beau Noeske, Senior Research Analyst for FDx Advisors.