Here we are at the beginning of a new year and stocks may be posting the worst start to a year since the early ’80s. This is on the heels of the worst year for equities since the start of the financial crisis. Apple (NASDAQ:AAPL), which is arguably the best company on the planet, fell 8% in 2018.
This wasn’t to an intrinsic problem since AAPL fell in line with the S&P 500. Apple stock has value and technical support. In the long-term, it will do much better than what current sentiment says it will.
Fundamental traders have been held hostage to headlines, and the instinct to “buy the dip” died. For the past few months, the consensus has been that the right thing to do is sell the rips.
As a result, great stocks have fallen from grace.
But the problem now is a crisis of sentiment. The fundamentals are still good and the macroeconomic conditions still favor the bullish thesis. Companies are improving their P&L’s and the U.S. is fully employed.
But there are worries that is shackling investors. Investors fear the tariff wars and the Federal Reserve. The new Chairman Jerome Powell caused a panic on Wall Street with his glib attitude toward raising rates even in the face of potentially deteriorating data. Investors hate uncertainty, and the malaise will loom until they find out his real intentions.
Apple is still an iPhone company for the most part. But management is trying to make the shift away from that perception. During their last earnings report, Apple spooked investors when it announced that it would stop reporting unit sales. The was the wrong reaction, because, going forward, investors will evaluate the company’s performance as a whole and not simply on how many iPhones it sold.
Apple’s services is the next opportunity area. This is the model trend that most companies seek. Recurring systemic income from customers is ideal, especially since in Apple’s case they have a very tight ecosystem. So its clientele is a captive audience through which they can push new services for new streams of high margin income.
This would then provide a base to feed innovation. Which brings us to a sore subject with many investors. Perception is that Tim Cook has failed to deliver innovation in the traditional sense. We haven’t had AH-HA moments presenting a new product under his watch. They bought a headphone company and invested in a Chinese Uber company but they are still mostly tied to how many iPhones they sell during a quarter.
This is causing problems for Apple stock. It has fallen 30% off its October highs. Then, everyone wanted to own it. Now suddenly the meme is that AAPL has a problem in iPhone demand. Even high-profile fans are now pessimistic about the short-term, so maybe we have run out of incremental sellers. So building a position or adding to one now will be profitable for the long term.
This is not the same as calling a bottom. Sentiment is still very negative and we could see another push lower, but eventually, fundamentals will win over sentiment. The globe leaders will come to their senses since all sides have so much to lose. They could simply kick-the-can-down-the-road and investors will eventually forget about it. Meaning the headlines would lose their wow factor.
If I buy Apple stock now, I have to accept the possibility of a few bad days still to come in the coming weeks. But the strategy is to profit for the long-term. This is still a company that sells at price-earnings ratio of 12, which is cheap. Compare it to the Coca-Cola Company (NYSE:KO) or Amazon (NASDAQ:AMZN), which have 30 and 95 P/E’s. Or even more ridiculous to say cannabis company Tilray (NASDAQ:TLRY), which has a $6 billion market cap and only $25 million in total sales.
I’ve been an outspoken critic of Tim Cook. He has failed to wow us in spite of having the best tools at his disposal. Moreover, under his watch, the company went from zero debt to $100 billion. This is not to say that they are in financial ruins, but for that kind of debt increase, I expect huge leaps in innovation.
I compare that to what Amazon has accomplished in the last few years by dominating the cloud for example. Now they a serious contender in the advertising and maybe transportation. Meanwhile, Apple is still an iPhone company. Nevertheless, it is still a great company to invest in for the long term. If the stock market is higher than Apple stock will be higher for the next few years.
Technically, the upside of a correction is that the stock falls into value. Apple is now in a zone that should lend support. Falling much further from here will require seriously bad news. Otherwise, this is a good base from which the bulls can start to build upside momentum into the earnings.
But as we’ve already noted there are still reasons to worry from headlines that are not Apple-specific. So I make sure that I only invest money I can afford to lose and I enter in tranches. Meaning I take a partial position to start so I can leave room to add if the AAPL stock price goes against me.
The experts agree since most analysts rate AAPL stock as a buy. And it is trading well below their lowest targets. Furthermore, most have already have downgraded their expectations so this reduces the odds of more of them to come. In fact, now the upside revisions are more likely to happen than downgrades.
Click here and enjoy a free video and more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
