Why Apple Scares the Daylights Out of Me

For a new client this week, a small weighting of Apple (AAPL) was purchased with the intent to add more if the stock tests the previous early December ’14 high of $119.75.

However, the stock has clearly been a monster for any buy-and-hold investor:

YTD return: +14.5% as of 3/25/15

1-year ret: +63.59% as of 3/25/15

* Source: ycharts.com

Although AAPL was down 2.6% today and has fallen 6.44% over the last month, it is the most universally loved name within the SP 500 right now, but that isn’t why its scares me.

Here are a few stats I’m watching:

AAPL’s market cap weight within SP 500: 3.96% (twice the market cap of Exxon at 1.91%)

AAPL’s earnings weight within SP 500: 6.4% (three times the next largest earnings weighting, MSFT at 2.1%)

AAPL’s market cap weight within QQQ: 14.43%

One ETF I’ve been considering buying for client accounts, although the homework is still being done on it, is the QQQE or the Direxion equal-weighted Nasdaq 100 ETF, simply to begin to diminish the impact of AAPL on client portfolios.

Since Trinity is primarily a fundamental investor first, here are some other key metrics that caught my eye of late:

Capital retn’d as % of Free-cash-flow (FCF), last 4 quarters:

12/14 quarter: 94%

9/14 quarter: 112%

6/14 quarter: 82%

3/14 quarter: 119%

Basically AAPL is currently paying out all of its free-cash-flow to shareholders, which is probably a prudent move given the attention being paid to AAPL by activist investors like Carl Icahn, etc.

Thus the real question is, “What does Apple do with the $180 billion or $30 per share just sitting on the balance sheet ?” I think that becomes the source of tension that AAPL will have to contend with activist investors.

The real vexing issue though is what if AAPL hits $1 trillion in market cap ? Suppsedly, the US economy is $15 trillion in size as measured by GDP, and the total US market cap of the SP 500 is roughly $19.5 trillion (see this table from this weekend), so AAPL’s market value would be roughly 6.7% of the entire US economy and 5% of the entire SP 500’s market capitalization.

The other metric that caught my eye, when AAPL’s forward EPS estimates were updated after the incredible December ’14 quarter, was that – at that point in Jan ’15 – analysts were expecting AAPL to print just $3.09 in EPS for fiscal q1 ’16 (which is the 4th calendar quarter, 2015) versus the $3.02 actual EPS print of q1 ’15. AAPL’s estimates havent been checked since mid-January, but clearly the Street was not looking for a similar quarter of iPhone 6 sales or any other product in next year’s holiday quarter. That isn’t much y/y growth for AAPL’s biggest quarter of the year.

I’m not doubting Mr. Icahn’s belief that the stock could hit $200 per share, given its free-cash-flow and the $30 per share in cash on the balance sheet, but these stats to me are scary beyond belief.

Apple is almost like its own index or own economy.

None of this is new to the Street. I simply had to write it out to give birth to my angst around the size and importance of AAPL.


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