What I’m Holding: Apple

The past couple of days I’ve written about the dynamics of bull markets and bear markets and the investor sentiment cycle, so today I’d like to discuss one of my larger holdings, and one of the most polarizing stocks in the entire S&P 500: Apple (AAPL). Today is a big day for Apple because the company is set to release its quarterly earnings report after the closing bell this afternoon. AAPL has traditionally been an extremely volatile stock when it comes to its earnings releases, often making massive price moves in after-hours trading and on the day following the release. So I’m sure with only a few minutes left before the closing bell, everyone wants to know whether they should buy or sell before the closing bell, right? Do I think earnings will beat or miss expectations?

Let me first start out by giving the reasons why I own AAPL. I first bought AAPL in January of 2013 for just over $511 per share after watching it fall from an all-time high of over $675 in September, 2012. At that point, the price of a share of AAPL had fallen nearly 25% in a period of a few months. As it turns out, the drop wasn’t over. Because I always keep cash in my account, I was able to add to my AAPL position at $468 and $460 over the following weeks. When I had completed my buying, the average price I paid for my AAPL shares was about $488. To get some perspective on the stock, let’s take a look at a three-year AAPL chart:


Before I continue with the reasons I like AAPL in the long-term, I want to make a couple of points about the price action of AAPL over the past couple of years. Anyone who read my article yesterday about market cycles should be able to recognize the cyclic appearance of this chart. The uptrend in AAPL that peaked in September of 2012 was a historic surge, and lots of people made a lot of money during that rise. Unfortunately, lots of people fell victim to the hubris that accompanies the peak in the investor sentiment cycle.

Sentiment cycle

For example, Andy Zaky (somehow) became famous for making clients of his  Bullish Cross Capital Management huge returns during Apple’s rise, and then promptly losing every last cent of it by making large bullish option bets on AAPL at the very top of the investor sentiment cycle.  At the peak of the cycle (as seen above), Zaky was charging $200 for his monthly newsletter and required a minimum of $500,000 to invest in his fund. That was the very point at which he was thinking, “Wow, I’m smart.” And I’m pretty sure “How could I have been so wrong?” is a pretty good summary of how Zaky felt when he was forced to shut down his fund in November of 2012 because, you know, all the money was gone.

But Zaky wasn’t alone in getting burned at the peak of the investor sentiment cycle. One of my favorite TV stock analysts, Jim Cramer, said in April of 2012 that AAPL reaching $1000 was, “likely a foregone conclusion.” And there were countless other analysts that were as bullish as ever on AAPL right at the top of it’s cycle. But what was the climate like in April of 2013 what AAPL had dipped below $400? Any AAPL shareholders will remember the constant stream of negative news, pessimistic analysis, and bold bearish predictions that were flying around during that period. Investment firm Jeffries cut its AAPL price target to $420 in March, 2012. But Edward Zabitsky had even that horrible prediction beat when, in March 2012, he predicted AAPL would reach $270 by the end of September, 2012.

So it’s easy to see that it’s not just naive new traders that fall victim to the emotions of the market. But why do I like AAPL? For many years, AAPL was a growth story, but now, unbelievably, it has become as much of a value story as anything else. Daniel Sparks at the Motley Fool probably presented my case for owning AAPL better than I ever could in the article he wrote yesterday. In his article, Sparks writes

It’s no secret that there is very little growth priced into Apple stock. In fact, trading at just 13 times earnings, it could be argued that Apple’s underlying business is priced to simply maintain its current levels of profits over the long haul. Even the broader S&P 500 trades at a considerable premium to Apple at 18 times earnings… 

Apple’s top line is still growing. The tech giant’s 2013 revenue of $170.9 billion, for instance, exceeded the company’s 2012 revenue by more than $10 billion…

Apple is just getting revved up in China with the world’s largest carrier, China Mobile. With Apple only beginning to sell iPhones through the carrier in January, and the carrier’s 4G network barely started, China Mobile’s 776 million subscribers will likely serve as a market for steady meaningful growth over the next several years.

Well said, Daniel. I agree. AAPL is priced as if its growth is not only over, but actually negative! And it’s not. Not only is it not negative, I believe that iPhone and iPad sales in China will continue to provide positive revenue growth for AAPL for years to come.

So what do I think about AAPL earnings this afternoon? Who knows. I believe in the long-term AAPL story, and one earnings report, no matter how good or bad, is likely not going to change my mind. That being said, it would sure be nice to see a big number!

Anyone can use the methods I learned and included in my book to harness their emotions and maintain the appropriate discipline throughout market cycles.  I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market in five years using only basic principles of psychology and common sense. To read about how I did it, check out my book, Beating Wall Street with Common Senseand stay tuned to tradingcommonsense.com!