What We Can Learn From the Decline in Apple
On CNBC, where they consistently drink the Kool-Aid, one of their commentators in 2015 said, “Apple is probably one of the lowest risk stocks to own.” I will bet he might want to take those words back.
Apple stock has had a rough ride. Over the past year it has dropped over 27%. One of the most popular stocks on the exchange that has been an investor favorite. At the same time, it has also been described as the “biggest wealth destroyer.”
Some 363 mutual funds owned the stock at the end of 2015. Then there are the investors who are chasing performance. If you are making money like Apple did, everyone wants to be involved. However, the great don’t stay great forever. What goes up can come down.
The good news is that there are investment lessons to gain from Apple.
As a company gets more profitable, expectations are hard to maintain
Profitability was one of Apple’s biggest problem. The more and more profitable Apple became Wall Street had higher and higher expectations for higher earnings. There comes a point where you get to big and expectations get out there way ahead making it impossible to keep Wall Street happy. Said another way, you have to sell a lot of Apple watches to make your earnings numbers. That hasn’t been happening. Unless they come out with some new technology soon, it could be a painful drop down to the stock price where expectations are realistic again.
Global economy means global risk
I have heard commentators blow off the influence of China’s economic decline in relation to the US. Unfortunately, that is not a wise move given that they are the second largest economy in the free world and we are all interconnected. Apple’s sales in China were down 26% in the latest report. That is the largest single regional decline for Apple. Plus, the Chinese government blocked Apple’s services such as iTunes and iBooks from its’ company. Here you have a double whammy. China’s economy is in free fall and their government controls what they want to control – and apparently that is Apple.
What Goes up Quickly Can Fall Hard – Always have an Exit Strategy
In 24 years of managing money, I have always found it interesting how investors can act as if a stock price can go up forever. There is always a peak. There are no sure bets. This is why it is important to have an exit strategy in place.
“When everyone thinks alike, everyone is likely to be wrong.”
Humphrey O’Neill had a famous saying. He said, “When everyone thinks alike, everyone is likely to be wrong.” When a stock or an idea/concept gets “crowded” it is usually a sign that the good times are about over. Everyone loved Apple Stock. Everyone liked Real Estate and Technology stocks in the early 2000’s and look what happened.
A 27% decline is hardly the end of the world. However, there are many things that are concerning about Apple even at this point. The key take away is what you can learn and apply to your investing.
Bob Brooks is host of The Prudent Money Radio Show, Financial Advisor, and active money manager that consults and helps people plan.