Why You Should Celebrate Apple's Sell-Off
Apple's Sell-Off is Good News
Let me set some ground rules right from the start: I'm not going to tell you to buy shares of Apple Computers on this dip.
I will absolutely not tell you that Apple's decline from $700 to $440 makes it a great time to scoop up shares. It's not.
I also will not tell you to look past Apple's two million iPhone unit miss just because the company still banked $13 billion in cash for the quarter. We may have just seen the high-water mark for net profits.
There's no way I can spin a record quarter for iPad and iPhone sales as bullish.
No, I come to bury Apple, not praise it.
Apple's sales were up 18% in the quarter. The year before, sales were up 73%. Despite the solid sales growth, Apple's net profit only rose 1%.
Investors rewarded Apple with a 12%, $62-a-share beatdown.
There's no two ways about it: Apple's growth is slowing. That's bad news for Apple investors. I don't take any pleasure in people losing money. But I will tell you this: That brutal sell-off for Apple shares is the best news the stock market has gotten in months.
That's right — I said Apple's sell-off is good news.
Let's go back in time a year or two, and I'll explain why...
As the U.S. economy was wavering toward recovery, Apple was a lonely beacon. Apple was the one stock that proved American innovation was strong; Apple was the one stock that proved consumers would still spend money on cool gadgets; Apple was the one stock that investors could own with confidence.
Apple was like Linus' security blanket, like a teddy bear on a stormy night: Apple gave us confidence when that most valuable economic commodity was in short supply.
The Confidence Game
Too many people (including some members of the Fed) act as though economics is an exact science. But as the Bernanke Theorem has proven, low rates + low inflation does not necessarily = economic recovery.
It's time that heals all wounds — time to pay your debts, time to get on better footing, time to build some confidence.
As someone wise once said, you have to go through it to get through it.
So far, Ben Bernanke has spent $3 trillion on time. In my opinion, he overpaid. Because the last few years would have passed anyway. With or without Bernanke, we would still be five years removed from the financial crisis. Things have a way of getting better.
Economics is a social science that hinges on confidence. Even just a few months ago, confidence wasn't great.
If Apple's bubble had popped last year, it would have been a disaster. It would have meant consumers didn't have the money to spend on cool gadgets. It would have meant American ingenuity was suspect. It would have meant even "the best company" was not a safe investment.
But today we have a totally different story: Apple shares have very nearly erased a full year of gains. And the stock market as a whole does not care one whit.
The Dow Industrials is now 200 points from an all-time high, and Apple shares are falling apart.
This is Exhibit A in the case of Bull vs. Bears. Yes, the bulls have confidence on their side now...
The King is Dead, Long Live the King
I can't tell you that I saw this decline for Apple coming. I didn't. I've traded Apple profitably on both upside and downside moves in recent months.
I did recommend selling a closed-end fund with a lot of Apple exposure from The Wealth Advisory portfolio that I co-manage with Brian Hicks in the January 2013 issue. But my reasons for selling weren't a grand call on the future of Apple... It was just that the shares weren't acting well, and since The Wealth Advisory is a conservative, income-focused newsletter, we always feel it's better to be safe than sorry. (Shameless self-promotion alert: The Wealth Advisory is up a fantastic 19.4% so far in 2013, including dividends.)
There are plenty of reasons Apple shares are selling off: Costs have risen, so Apple's profit margins aren't as good as they have been. And as lower-cost phones like the Samsung prove to be every bit as functional as the iPhone, analysts expect Apple's profit margins to shrink further.
Yes, Apple's growth story has been declared dead. Maybe it is, maybe it isn't. We'll see...
But one thing is for sure: Investors don't need the Apple security blanket anymore.
Instead, we've got improving growth in China and the rest of Asia. Every multinational company that's reported 4Q earnings so far has said they are seeing much strength from Asia.
We've got new lows for unemployment claims. And the housing market recovery is gaining traction: Home-improvement company Lowe's is planning to hire 45,000 temporary workers for the spring, as well as 9,000 permanent part-timers.
Ford is hiring 2,200 full-time employees. Wal-Mart says it will hire any military vet within a year of their discharge. That may be 100,000 over five years.
Europe's debt crisis appears to be resolved. Growth will be anemic, but the breakup of the EU is now off the table.
U.S. manufacturing continues to improve, we've got massive growth in our domestic oil and gas production, and our Congress was actually able to compromise on the tax aspect of the fiscal cliff.
Best of all, stocks are not pricey. The S&P 500 now trades with a forward P/E of just 13. This bull market is alive and well.
Old Economy vs. New Economy
Here's one particular irony about the Apple story...
When its market cap surpassed $420 billion, it became the biggest company in the world. And it's a tech company. And a consumer tech company at that. Nothing about Apple's products are needed or necessary. We might even call Apple a luxury consumer tech company.
And as the total value of the phones and tablets and apps and downloads climbed past $500 billion — as the Apple ecosystem became worth more than the state of California — it was a triumph of the new economy.
Well, Apple's not the biggest company in the world anymore. On Friday, it passed ExxonMobil — on the way down.
We may have needed Apple's growth story and unrelenting share price advance during the dark and difficult days of economic recovery, but we actually need Exxon. Unlike Apple, Exxon's products are essential to the global economy; without them, we go back to the Dark Ages.
Over the long term, the stock market will always reward those companies that are vital to the economy. The most successful investors understand this.
Warren Buffett once said he didn't invest in tech companies like Apple because he didn't understand them. He didn't mean it literally, as in, he doesn't understand cell phones or websites or computers; he meant that he didn't understand the life cycle of technology.
New technology replaces current technology at an alarming rate. It's not enough to simply make current tech products better or more efficient. Because somebody out there will inevitably drop an innovation bomb on you. That's what Apple did with the iPhone and the iPod. And the life cycle for these products seems to be already nearing its end.
Of course, you can make a boatload of money if you get it right. At their highs, Apple shares were among the best-performing stocks over the last 10 years. But if you bought in the last year or two, you're not doing as well.
I can see why investors like Warren Buffett stick with investments they understand.
One of Buffett's most recent investments was also the biggest of his career. It's also becoming one of his most successful...
In just a couple years, he's made back the majority of his $34 billion investment — and he needn't worry about any product life cycle changes. This investment is going to keep making money for Buffett long after he's gone.
And this time, you can join him as he makes the easy money. In fact, I've seen estimates that this investment will likely rise better than 500% over the next 10 years. That, my friends, is how you invest with confidence.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
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