If you take a close look at the "Magnificent Seven" mega caps, Apple (AAPL) stands out... But not in a good way.
What to Do With a Highflier Like Apple
By Joe Austin, senior analyst, Chaikin Analytics
If you take a close look at the "Magnificent Seven" mega caps, Apple (AAPL) stands out...
But not in a good way.
It has the slowest revenue growth of the group. But its forward price-to-earnings (P/E) ratio of about 30 times is close to most of the others.
So if you're putting new money into Apple today – or if you own it – that's a steep price for slow growth.
But Apple is still in that Magnificent Seven. And these stocks are "magnificent" because they dominate the market.
So as long as that domination holds, that momentum isn't something you want to bet against.
The Magnificent Seven constitute about a third of the market cap of the S&P 500 Index. And they're responsible for around 50% of the market's gain this year.
So when money flows into the market, money flows into these stocks.
But especially with Apple, we all worry that nothing lasts forever.
And in the past 10 years alone, Apple has had three drawdowns of greater than 30%.
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Keep in mind that Apple was the first member of the Magnificent Seven to go public. It held its initial public offering ("IPO") in December 1980. It didn't make the top 100 of the Fortune 500 until 1990. And at the time, it was only No. 96 on the list.
But today, Apple is a global behemoth. It boasts a colossal $3.4 trillion market cap. And we wouldn't have smartphones or tablets without it.
Apple's greatest asset is its loyal customers. According to a survey by Bloomberg last year, 93% of Apple customers said they would buy another Apple smartphone. That compares with only 80% of Android users.
But that same report also showed Apple's installed base of phones would only grow 2% per year going forward. That's compared with the previous three-year average of 5%.
Apple's share of the smartphone market is also in decline. It lost its No. 1 spot to Samsung earlier this year.
And in terms of new products, there's not much to get excited about...
Like any tech company, Apple is jumping on the AI bandwagon as fast as it can.
However, AI will be just another feature on its phones. That might sell more of these devices... but likely won't bring in much in revenues outside of that.
The Apple bulls like to talk about the company's healthy cash balance. And they'll bring up the company's return of cash to shareholders through buybacks and dividends.
In its most recent quarter, Apple had more than $150 billion in cash, cash equivalents, and long-term securities on its balance sheet. Against that, it had more than $85 billion in debt. During the quarter, the company bought back some $25 billion of its stock.
But a lot of Apple's cash is in overseas subsidiaries. And it can't really use that cash unless it pays taxes on it first.
Plus, if buying back stock is the best thing a tech company has to do with its cash, that's no great endorsement for growth going forward.
So where does that leave us?
I keep going back to Apple's P/E ratio at 30 times. It's just too high for a company that's not showing better growth.
But that doesn't mean to rush out to sell all your shares if you own the stock. I'm still not betting against Apple – or the Magnificent Seven, either.
A wise (and wealthy) investor I know once taught me his strategy for high-flying, richly valued stocks if your position is making you nervous...
His idea was to look at your percentage gain. Sell a corresponding amount. And be happy.
So for example, if you're up 30%, you could sell a third of the position... and enjoy your success. If you're up by 50%, you could sell half... and consider yourself lucky.
If the gain is anything more than 50%, you could think about selling at least half of the position. And then you can channel your energy into finding something else to buy.
His idea was rooted in two principles...
The first is that stocks that are up the most usually fall the most. And he wanted to avoid speculation and momentum whenever he could.
The second is that new ideas usually have the best potential in terms of return. So selling gives you fresh capital to put to work.
For example, here at Chaikin Analytics, we fish for those new ideas with our one-of-a-kind Power Gauge tool.
As regular readers know, it looks at more than 20 distinct factors – ranging from financials, to technicals, to expert analysis. And it distills all that information down into a single rating. These ratings range from "very bearish" to "very bullish."
This helps us find stocks poised for big upside. And it helps us avoid stocks that look primed to fall.
Right now, Apple has a "neutral+" rating in the Power Gauge. Put simply, our system doesn't see as much upside with the stock as it would with a stock with a "bullish" or "very bullish" rating.
So as I said, Apple's high P/E ratio combined with its slow growth makes me wary of the stock at these levels. And if you're holding the stock and worried about giving up gains, you could consider trimming your position.
Meanwhile, I'll be using the Power Gauge to help find that next big idea.
Good investing,
Joe Austin Editor's note: If you haven't heard already, Chaikin Analytics founder Marc Chaikin is using the Power Gauge for what he calls a "rapid fire" moneymaking opportunity...
Put simply, this strategy is a new way to find the potential buying sprees on 5,000 different stocks before they occur. And Marc says right now is the perfect environment to put it to work.
— According to the Chaikin Power Bar, Small Cap stocks and Large Cap stocks have become Bullish. Major indexes are mixed.
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Sector Tracker
Sector movement over the last 5 days
Energy
+6.27%
Financial
+5.2%
Discretionary
+4.74%
Industrials
+4.46%
Communication
+2.75%
Information Technology
+1.63%
Materials
+0.35%
Health Care
-0.02%
Staples
-0.9%
Utilities
-1.92%
Real Estate
-3.0%
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Industry Focus
Health Care Services
7
41
12
Over the past 6 months, the Health Care Services subsector (XHS) has underperformed the S&P 500 by -5.23%. Its Power Bar ratio, which measures future potential, is Weak, with more Bearish than Bullish stocks. It is currently ranked #15 of 21 subsectors and has moved up 3 slots over the past week.
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