Market Recap – Disappointing Earnings From Apple & Slow GDP Growth

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Market Digest – Week Ending 4/29

The rally in stocks took a breather this week and major indexes posted moderate declines. Disappointing earnings from Apple, slow GDP growth, lack of additional stimulus from the Bank of Japan, and uncertainty about Fed plans gave investors pause. Interestingly, most of the declines occurred in a short period immediately after Carl Icahn said stocks were dangerous and announced that he had exited his position in Apple. The dollar fell against most currencies. Bonds gained as expectations for further rate hikes diminished. Largely as a result of currency, gold and commodities rose.

Weekly Returns:

S&P 500: 2,065 (-1.25%)
FTSE All-World ex-US: (-1.4%)
US 10 Year Treasury Yield: 1.83% (-0.06%)
Gold: $1,294 (+4.9%)
USD/EUR: $1.145 (+2.0%)

Major Events:

• Monday – Saudi Arabia announced plans to list up to 5% of its state owned oil company with an expected valuation of $2-$3 trillion – making it roughly four times more valuable than any other public company.
• Monday – Regulators were said to be ready to approve Charter Communications acquisition of Time Warner. In exchange, Charter agreed not to impose data caps for seven years.
• Tuesday – China’s government is banning construction of new coal fired power plants in areas that have surplus power, dealing another blow to the struggling coal industry.
• Tuesday – Ant Financial, an affiliate of Alibaba and a provider of electronic payments, raised $4.5 billion (largely from state lenders and financial firms) at a $60 billion valuation.
• Tuesday – Apple and Twitter each reported disappointing earnings. Apple reported the first decline in revenue in 13 years.
• Tuesday – Clinton and Trump had big successes in primary voting in five states, helping cement their frontrunner status.
• Wednesday – As expected, the Fed left interest rates unchanged and remained ambiguous about raising rates at its June meeting.
• Thursday – Comcast agreed to buy DreamWorks Animation for $3.8 billion. The deal will help Comcast mimic Disney’s strategy of merchandising and character driven theme parks.
• Thursday – US Q1 GDP growth was reported at 0.5%, below most expectations.
• Thursday – The Bank of Japan surprised many by not adding additional stimulus at its meeting. Japanese stocks fell and the Yen rose.
• Thursday – Amazon reported earnings and sales above expectations. Shares rose 9%.

Our take:

For Apple shareholders, it feels like some of the magic has dissipated. Now it is time for reality. What that looks like is hard to say. Smart phones are pretty much commoditized, but Apple remains a popular brand, is a fashion item, and has millions of people’s data, photos and songs committed to its ecosystem. All of this translates into the company continuing to make way more money than anyone else (almost $10 billion in a “disappointing” quarter). iPad will probably never be a truly great business but the watch is starting to grow and could be.

I’ve always been wary of phone makers because I watched what happened to Motorola when they had the coolest phone, then Nokia when they had the coolest phones. It wasn’t pretty. Hardware is tough.

When Apple hit $700 per share (prior to its 7-1 split) back in 2012, I dedicated this section of the weekly digest to suggest the stock may be overvalued and retail investors with a concentrated position should consider diversification. I further suggested the stock was equally likely to drop to $400 or hit $1000. It kind of did both – first falling below $400 then rising to $924 on a split adjusted basis. The stock closed at $93.74 today, which would be $656. Holders also collected about $49 in dividends along the way, meaning the stock has done pretty much nothing over the last four years. In that time you would have been up about 50% in the S&P. This is not really fair to Apple as it cherry-picks the top. Generally speaking, Apple has done well by its shareholders over the last five years and REALLY well for those who bought before 2012. It isn’t surprising Apple hasn’t fared well recently because since 2012 it has become so popular to own. Whenever so many retail investors want to own something, and do, it is a red flag.

It is a little less popular now. I don’t pretend to know where the stock is going, but I have less concern now than I did in 2012. Part is sentiment. More important is valuation. The company is trading at a PE of 10, less than half the overall market. That doesn’t even factor in its huge cash hoard.

Apple is held in most Personal Capital managed accounts because it provides appropriate exposure to mega-cap technology, not because we have a specific price target. In the end, Apple is a great company and may do amazing things. But if you have a concentrated position you must consider the risk. Just ask anyone who worked at Nokia. When considering the right portfolio weight, remember that if you also own an S&P 500 or Total Market index, Apple is roughly 3% of that fund already.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
Craig Birk, CFP®

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