Apple Inc. (NASDAQ:AAPL) share price has doubled, but there is a crunch coming – investors should watch out
Apple shareholders must be extremely happy with the company’s performance in the past 12 months. The stock price is up 111% since the end of 2018, not to mention the US$3 (£2.31) per share that the company has paid in dividends over the period. While Apple’s full-year 2019 results will not be released until later in January, it generated operating income of US$15.6 billion in the third quarter of the year. That translates to about US$60 billion a year, or about the same size as the economy of Luxembourg.
If you had invested US$100 in Apple at the beginning of 2019, you would have more than doubled your money in just one year. But we also need to look at this from the other side of the market. New investors must now pay over double the price they would have paid for Apple shares one year ago.
This depends on what I call the stupid investor theory. This states that for a short-term investor to profit from buying these shares at the start of 2019, they must be able to sell their shares to a “stupid” investor now that they have appreciated in value. This buyer will be forward-looking, probably short-termist as well, trading on the expectation that they will find a third “stupid” investor later willing to pay an even higher price.
The important thing to take away is that this cannot go on indefinitely. And as we shall see, there is a reason why it probably can’t go on for much longer at all.
Shooting stock, profits plunging
To see how long this pattern can hold, we need to assess whether Apple’s performance is sustainable. When you compare the last four quarters’ operating income – from fourth quarter 2018 to third quarter 2019 – with the previous four, you’re looking at a fall of 10%. Over the same period, the company’s revenues dropped by more than 5%. The main culprits were falling sales of iPhones, in a world saturated with smartphones, and a big tailing off in China, which is the company’s third-largest market. Growth businesses such as the iWatch and the app store were not enough to offset the decline.
Why then, was Apple’s stock return so high? The answer is actually very simple. In 2019, the company’s financial strategy consisted primarily of repurchasing its own shares, which had the effect of boosting the stock price artificially.
In calendar 2019, based on my estimates using information from Datastream, the company spent US$74 billion to buy 7.6% of its outstanding shares on the open market. That’s over US$300 million for each of the 250 trading days in the year. Stock repurchases have a very simple mechanical effect: fewer shares mean higher earnings per share, which drives up the per-share return, a key metric in appraising a company. In early 2014, when Apple started its large buyback program it had 6.3 billion shares outstanding and earnings per share (EPS) of US$5.68. By December 31 2019, EPS was US$12 on 4.5 billion outstanding shares.
Apple calls this “returning money to shareholders”. Luca Maestri, the chief financial officer, stated in the most recent financial release that in the third quarter of 2019:
We also returned over US$21 billion to shareholders, including almost US$18 billion in share repurchases and US£3.5 billion in dividends and equivalents, as we continue on our path to reaching a net cash neutral position over time.
This money was indeed transferred to shareholders, but with two caveats. First, those who sold their shares did so because they left the company or at least reduced their stakeholding – in other words, Apple is rewarding its least loyal investors by enabling them to cash out at a high price. That is a strange way of returning money to investors since it discriminates against those who are not selling. Returning money via the buyback route has the added bonus in some jurisdictions, such as the US and Switzerland, of being more tax-favorable for these investors compared to the more regular dividend route.
The second caveat is that the company is repurchasing its stock at higher and higher prices. For example, while in the last quarter of 2019 Apple repurchased 59 million shares at an average price of US$266, in the first quarter of 2018, the company bought 159 million shares at an average price of US$171. You begin to wonder if Apple is the stupid investor.
The end is nigh?
Maestri’s quote also puts a use-by date on this strategy. Apple expects to continue buying back stock until it reaches a cash neutral position. This is the moment when the company’s cash equals its debt. As of September 2019, cash holdings are US$100 billion and debt stands at US$91 billion. The company’s annual cash flow is about US$25 billion a year, which is only about a third of the money spent on repurchases in 2019. Since the gap between the existing cash holdings and debt is nowhere near enough to cover the difference, the buyback frenzy is clearly not going to continue.
What Apple needs is a focus on innovation and not on financial engineering. I argued in a Conversation article in December 2018 that the company is no longer considered a growth stock by markets. Investors only buy expensive stocks when they have high expectations that the company will continue to grow. For the company’s shareholders, the question is this: who will buy their stock if or when Apple cannot do it anymore?
Overall, the bias in prices is: Upwards.
Note: this chart shows extraordinary price action to the upside.
By the way, prices are vulnerable to a correction towards 287.36.
The projected upper bound is: 326.56.
The projected lower bound is: 308.96.
The projected closing price is: 317.76.
A black body occurred (because prices closed lower than they opened).
During the past 10 bars, there have been 5 white candles and 5 black candles. During the past 50 bars, there have been 32 white candles and 18 black candles for a net of 14 white candles.
A spinning top occurred (a spinning top is a candle with a small real body). Spinning tops identify a session in which there is little price action (as defined by the difference between the open and the close). During a rally or near new highs, a spinning top can be a sign that prices are losing momentum and the bulls may be in trouble.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 82.8807. This is an overbought reading. However, a signal is not generated until the Oscillator crosses below 80 The last signal was a sell 3 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 74.73. This is where it usually tops. The RSI usually forms tops and bottoms before the underlying security. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 36 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 88. This is not a topping or bottoming area. The last signal was a sell 0 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 24 period(s) ago.
Rex Takasugi – TD Profile
APPLE INC closed down -2.160 at 316.570. Volume was 1% above average (neutral) and Bollinger Bands were 75% wider than normal.
Open High Low Close Volume___
317.190 319.020 316.000 316.570 27,710,814
Short Term: Overbought
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period 50-period 200-period
Close: 311.31 280.81 226.83
Volatility: 23 20 29
Volume: 32,983,566 27,505,596 27,365,660
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
APPLE INC is currently 39.6% above its 200-period moving average and is in an upward trend. Volatility is Our volume indicators reflect moderate flows of volume into AAPL.O (mildly bullish). Our trend forecasting oscillators are currently bullish on AAPL.O and have had this outlook for the last 105 periods. Our momentum oscillator is currently indicating that AAPL.O is currently in an overbought condition.
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