Have Apple Shares Fully Reset for No Growth 2016?

/0 Comments/in /by

Apple reported December quarter results in line with recently lowered Wall Street expectations.  A much greater focus for investors was guidance for the current quarter.  Apple released guidance that was below Wall Street analyst estimates but similar to the much lower expectations held by large investors like hedge funds and mutual funds.  It is not unusual for investors and analysts to have different estimates.  Perhaps the bigger news was that management spoke very cautiously about the global macroeconomic environment and the pressure it was placing on Apple.  We do not recall Apple ever making similar comments.  Management noted pressures in all regions, including Hong Kong and China.  Apple shares are trading down about 5% following the report and Northlake believes it is the cautious macro commentary, especially in China, that is providing the bulk of the pressure.

Apple shares have been under pressure for about six months as investors began seeing that 2016 was going to be a no growth year for the company.  The growth challenge is coming from multiple sources including (1) the massive success of iPhone6 which offered widely demanded larger screens that likely pulled forward demand from iPhone6s, (2) foreign currency translation pressures, and (3) the macroeconomic weakness noted previously.

The next growth catalyst is iPhone7 that is due to be released in late fall.  Historically, the full number upgrades have triggered accelerated growth over the “s” versions.  This should be the case again with a boost from the fact that only 40% of iPhone5s or earlier owners have upgraded to the larger screen phones.  Apple also continues to gain share vs. Android at the high end with switchers reaching records in the latest quarter.  Northlake sees renewed growth for iPhones coming this fall but the growth rate is unlikely to be high given there does not seem be a killer upgrade coming similar to the larger screens from iPhone6.

Hope for renewed growth in the fall and what we expect to be a material increase in Apple’s share buyback and dividend to be announced in April should provide support for Apple shares near current levels now that expectations have been lowered.  Of course, the path of the global economy and stock market matters as well.

Apple shares are now trading at 10x 2016 earnings without given credit for almost $28 in net cash held by the company.  This valuation is similar to the bottom seen in other tech leaders that saw their growth rate stall including Microsoft, Cisco Systems, and Intel.  Given Apple’s unique financial strength, a growing installed based that is driving over 20% growth in services revenue (Apple Pay, iCloud, Apple Music, Apple Store), and the prospect for renewed growth later this year, we think Apple is worth holding.  Should the skies clear as we expect, Apple shares could easily return to $120 or better providing substantial upside.  We do not see a lot of downside here other than macro related.  As a result, while it may take patience, the prudent choice is to hold Apple shares.

AAPL is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  AAPL is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

 

 

Mid Cap and Growth Favored to Start the New Year

/0 Comments/in /by

Northlake’s Style model flipped back growth to start 2016 after spending just one month at neutral to end 2015.  As a result, client positions in the Russell 1000 Value (IWD) were sold and proceeds reinvested in the Russell 1000 Growth (IWF).  There is no change to the mid cap recommendation for the Market Cap model.  Client positions in the S&P 400 Mid Cap (MDY) will be held at least one more month.

The Style model moved back to a full growth signal due to a change in the indicator that measures the performance of consumer stocks to cyclical stocks over a three month period.  Consumer and cyclical are a good proxy for growth and value.  The balance of the Style model is unchanged with the majority of the indicators favoring growth.

The Market Cap models remains on a mid cap signal as it has since August.  There was underlying movement toward large cap.  In fact, if all the signals are unchanged next month, the recommendation would shift form mid cap to large cap. For January, two indicators shifted from small cap to large cap, one measuring market breadth and the other measuring investor sentiment.  Overall, the Market Cap model has ten factors favoring large cap and six favoring small cap.  As a reminder, the Market Cap model indicators favor either small or large cap and a split decision leads to a mid cap recommendation.

The models performed well in 2015.  The Style model led the way, gaining over 3.5%.  The model did a good job of capturing the outperformance for large cap growth stocks in 2015.  The Market Model produced a small loss of -2.8% in 2015.  Mid cap was the favored recommendation for all but two months of the year.  Large cap would have been the best call but small cap did much worse than mid cap.  Overall, it was a solid performance for the models and encouraging after the models were updated with some major changes beginning in November 2014.

MDY and IWF are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.