Charles Wilson was a CEO of General Motors (GM).
At a congressional hearing in 1953, he said, “As goes GM, so goes the nation.”
Sixty-eight years later, America has changed.
One should now say, “As goes Apple, so goes the nation’s stock market.”
I said on Tuesday that this was a critical week for the markets.
Forget about the Federal Reserve meeting. And forget President Biden’s speech.
This week, six mega-cap companies – representing north of $9 trillion in combined market cap – reported earnings.
The biggest titan of this fraternity reported quarterly earnings yesterday.
Apple’s (AAPL) earnings report is very important. I can’t stress this enough.
The company represents nearly 6% of the weight of the S&P 500 and almost 11.3% of the NASDAQ 100.
So, pay attention if you invest in stocks, index ETFs, or even U.S. bond markets.
Here’s what you MUST know about the world’s largest tech company (by revenue and brand value), its earnings results, and what to do about its stock.
These Numbers Are Just Absurd
In 2006, Apple’s market capitalization finished the year just under $73 billion.
Fifteen years later, its market cap sits at roughly $2.24 trillion.
That figure is larger than the gross domestic product of all but seven economies worldwide.
Here’s another figure to show how fast Apple has grown.
Yesterday, it announced plans to add $90 billion in cash to its existing stock buyback program. That’s right. Its new cash injection to buy back its own stock is larger than its market cap from 15 years ago.
Now, you likely know Apple’s story.
Tech visionaries Steve Jobs, Steve Wozniak, and Ronald Wayne founded Apple in 1976. The company found acclaim for its innovative design and exciting marketing strategies.
But it struggled in the 1980s due to high costs and limited software applications. It also saw infighting among executives. Wozniak and Jobs left the firm in the mid-1980s.
Jobs returned and became CEO in 1997 after Apple purchased his company NeXT. He inherited a struggling company that lost significant market share and faced financial challenges.
Jobs soon launched a strategy to revitalize its market position. In 2001, the company shifted part of its focus to music and music players with the onset of the iTunes store and the iPod.
It also opened its chain of popular retail locations called Apple stores.
(If you own any Apple products like I do, you may have spent time at one of these locations learning how to use them.)
Apple’s shift at the start of the 21st century focused on a mix of hardware and services. A few years after the success of its growing digital-music footprint and the iPod, it would soon revolutionize communications.
In 2007, Jobs’ team released a new product: the iPhone.
That set off one of the greatest runs for a consumer product in the history of capitalism. The iPhone is in rarified air with other hot consumer products like Sony’s PlayStation consoles, the Star Wars franchise, the popular Toyota Corolla, and Apple’s own iPad tablet devices.
There have been 12 iterations of the iPhone, each delivering greater sales each time.
Statista notes Apple had the largest global market share of smartphone sales in the final three months of 2020. The iPhone generated more than $40 billion in net sales in fiscal Q2 2021 all by itself. That monster figure is only one highlight of Apple’s blowout fiscal Q2 earnings report.
The Fiscal Q2 Blowout
The few skeptics left around Apple hurried out the door Wednesday. In fact, Goldman Sachs analyst Rod Hall finally threw in the towel and admitted defeat after nearly a year of rating the stock a Sell. Since Hall put Apple on the bank’s Americas Sell List last April, shares have rallied 70%.
He upgraded the stock from Sell to Hold on Wednesday.
It’s an understatement to say things are well at Apple Park, the firm’s headquarters in Cupertino, California.
Apple experienced revenue records across each of its international business segments. Sales in China increased by 88% year-over-year, while North American sales popped by 35%.
Apple reported a 54% increase in total revenue, raking in $89.6 billion for the fiscal Q1 of 2021. That figure crushed Wall Street analysts’ consensus expectations by $12.3 billion. iPhone and Mac product sales drove a significant chunk of that success.
At this point, I have to ask, “What would Apple need to do in the future to disappoint people?”
Its gross margins increased by 42.5%, rising from $22.4 billion in fiscal Q1 2020 to $38.1 billion in fiscal Q1 2021. That big boost created gobs of cash flow that fortified Apple’s balance sheet.
The firm’s balance sheet increased its cash on hand to – get this – $195.57 billion.
That figure nearly rivals the State of California’s proposed annual budget ($227.2 billion) for 2021-22.
With that much cash, Apple can do anything it wants.
It could buy one of hundreds of firms on the S&P 500 (barring antitrust opposition, of course).
It could afford Morgan Stanley’s market capitalization of $154.6 billion. It could afford Volkswagen ($153.7 billion), or even Snap and General Motors in a double deal (a combined $178.9 billion).
None of those deals will happen (again, antitrust issues or lack of strategic fit).
But it gives you a sense of how much cold, hard cash this company has to put to work in the future.
And, it turns out, executives did so on Wednesday for their shareholders.
Apple announced it would increase its dividend by 7% to $0.22 per share. It also announced expanding its existing stock buyback program by another $90 billion.
This is very good news for investors.
But after all this positive news, is the future still bright at Apple?
Should You Sell Apple Right Now?
Apple shares continued to trade higher today.
They’re back within striking distance of an all-time high of $145.09.
The question on every investor’s mind is what comes next.
Should investors sell Apple shares after this strong earnings report?
That seems like a no-brainer. But let’s go a step further.
If you’re an Apple shareholder, what tools would you use to decide what to do next?
And if you are thinking about buying Apple, what resources can help you make the best decision?
The newspapers? CNBC? Barron’s?
Don’t make me laugh.
Remember, I told you a crazy number about the “smart money” on Monday. It turns out that 74% of money managers think they are above average at their jobs. (That’s a statistical improbability that shows many people are overestimating their performance.)
These are cognitive biases that can impact your decision-making.
Do you trust those media sources?
I don’t. And you shouldn’t either.
If you look at the headlines, the talking heads will tell you that the broader markets are very top-heavy.
The data will show we haven’t seen P/E ratios like those we face today since the dot-com bubble.
There are so many threats, like inflation. There’s no shortage of chatter about the Federal Reserve, China, COVID, or a semiconductor shortage…
And what is Wall Street saying?
You don’t have to read Barron’s to get some analyst with a 50-50 track record to tell you his latest price target. There are several analysts who rate Apple a sell right now.
This is all hogwash, in my view. It’s all noise meant to distract you.
You ONLY need actionable signals that tell you exactly when to buy and hold and when to sell.
If you’re worried about the stock falling, you can use a standard trailing stop, or – even better – TradeSmith’s custom trailing stops, which give you the optimal exit point to protect your principal and gains.
A day after earnings, Apple sits in the Green Zone, signaling that it is an excellent time to buy and hold the stock.
Now, Apple has been in our Green Zone just over a year and is nearly double its price in that timeframe.
You’re probably saying to yourself, “this stock can’t go higher,” but it can and it will.
These tools remove the emotion of buying and owning a stock. And they provide a precise exit point based on price history and risk tolerance.
Apple’s risk, or VQ, within TradeStops is a little more than 25%. That means it poses a medium risk as compared with a stock like Tesla that’s more than double that.
Apple will move around over time, but it’s in our Green Zone and it carries moderate risk.
And there are more signals that improve our conviction around Apple. The stock is a common component in various strategies on the TradeSmith platform.
Each strategy reflects different investment styles, risk tolerances, and expected outcomes.
These strategies include Low Risk Runners, Best of the Billionaires, and Sector Selects.
Apple is also a popular position in the Billionaire’s Club and is owned by prominent investors like Warren Buffett, Bill Gates, and Charles Schwab.
So, if you don’t own Apple now, it’s still a great time to get in on the stock! And for me, the perma-Apple fan, I will always love their stock!
Tomorrow, we’ll discuss how TradeSmith generates its signals on another Green Zone stock.