One year ago, I wrote a column titled “Sell Apple.”
You can read the whole article here if you like, but the important facts are these:
Back then, Apple (AAPL) stock was the most popular stock in the market, and the most highly valued too! It was trading at 123 per share.
But the stock’s chart showed a clear long-term divergence; the stock was hitting new highs but the RP (relative performance) line was trending down, showing that the stock was a chronic underperformer.
The combination of high (possibly peak) popularity and a diverging chart told me that the sellers were slowly gaining power at AAPL, and that as the movement gained momentum, more and more investors would choose to sell their shares.
Eventually, the theory went, the absence of new buyers would lead to lower prices for AAPL stock, quite likely far lower than most investors could imagine.
To date, that scenario has played out pretty well. AAPL stock fell as low as 89 (a drop of 27%) in early May, but last week, the stock gapped up on big volume, following a healthy second-quarter earnings report.
So what comes next?
The people who bought after the earnings report clearly think there’s more upside ahead, as Apple rolls out new iPhones (7 and 7 Plus) in September. Longer-term, many investors are also expecting success from Apple Pay, Apple TV and even—eventually—an Apple car, or at least the software to control a car.
Also looking for more upside for AAPL stock are many value investors, who argue that with a P/E ratio of 12, and more than $200 billion in cash reserves, the company is cheap and has lots of opportunities to grow through acquisition.
But I think there’s still more downside ahead for the stock, and my primary reasons still relate to both the chart and public perception.
This is what the chart looks like now.
Note the continuing downtrends of the both the price and RP lines; the gap up last week simply brought AAPL stock up to its trendline.
Then, note that AAPL is still a very popular stock! It’s one of the most frequently checked stocks on online charting websites. And people in general still love the company—which to me means there are still more potential sellers than buyers.
My original article telling you to sell Apple referred to two other big technology companies that had unusually long declines after being king of the hill. Those were IBM (IBM) and Microsoft (MSFT).
And now we have two fresher examples to illustrate what happens if you don’t continue to innovate—which is quite a challenge when you’re the size of Apple.
Exhibit A is Nintendo (NTDOY), which I wrote about last week in connection with its new hit game Pokemon Go.
Back in 2009, Nintendo had revenue of $18.6 billion, thanks to its Gameboy and Wii and other game platforms. But Nintendo refused to make apps for mobile phones, and as a result, Nintendo had revenues of just $4.2 billion last year!
Exhibit B is Yahoo! (YHOO), which was once famous for having both a crazy name and an awesomely popular web portal. In 2008, the company rejected a takeover offer of $45 billion from Microsoft.
But the world changed and Yahoo! didn’t. Nobody even talks about web portals anymore. And Yahoo! was just bought by Verizon for $4 billion. (I fear they may have overpaid.)
In their day, Nintendo and Yahoo were wildly popular stocks, though not in the realm of Apple—which is almost in a class of its own. But things change, and it’s the exceptional company that can stay on top of its game decade after decade.
So, while personally, I expect to keep using Apple products for a very long time, as an analyst, my expert judgment is that AAPL (the stock) is still in a downtrend and likely to see lower lows in the months ahead.
I could be wrong, of course. I sincerely hope that Apple continues to innovate in ways that make consumers happy to open their wallets. But this business has taught me over and over that the mighty can fall, and that innovation, from companies that are not household words, is never-ending. And the sum of those lessons brings me again to the conclusion that Apple is likely headed lower.
Now, this doesn’t mean you should run out and sell AAPL stock short. In a bull market as powerful as this one, I don’t recommend shorting anything.
But it does mean that if you’re looking for real growth, you should look for stocks that are less popular than Apple.
One example of a stock less popular than Apple is:
Goldman Sachs (GS)
There are a lot of reasons for people to hate Goldman Sachs:
Its ties to government officials, which reinforce critics’ beliefs that the connected get special treatment.
Its involvement in insider trading cases.
Its involvement with the bailout of AIG.
Its involvement in the subprime mortgage crisis.
Its manipulation of commodity prices.
Its solicitation of kickback bribes for IPOs, and more.
Whether these things are true or not doesn’t matter to people; it’s perception that counts, and the perception of the man on the street is that Goldman Sachs is not his friend.
Goldman, in fact, might even be seen as the anti-Apple, considering the lack of good feeling people feel have toward the company.
Which means to me that it just might be a great stock to buy, if you can get it at a reasonable price.
And happily, at least one Cabot analyst agrees with me.
Crista Huff, in her latest issue of Cabot Undervalued Stocks Advisor, wrote this:
“There is literally only one big-name bank with strong enough growth prospects and low enough P/E to meet my investment criteria: Goldman Sachs Group (GS). Wall Street’s consensus EPS estimates reflect 17.5% and 23.8% growth in 2016 and 2017 (December year-end). The corresponding P/Es are quite low in comparison, at 11.0 and 8.9, indicating that the stock is significantly undervalued. In recent years of normal earnings growth, the P/E on GS ranged from 8 to 12. Now that the company is producing outsized earnings growth, there’s room for an expansion of the P/E range. The stock has a current dividend yield of 1.6%. I think that any investor who wants to own a bank stock has the decision made for them: Goldman Sachs so dramatically outranks its competitors today on earnings growth and valuation, that it’s the clear choice among bank stocks in 2016.”
Crista wrote more, of course. In fact, she also wrote a passionate piece on the possibility of overturning the Dodd-Frank financial legislation of 2010 and what it would mean to the industry in particular and the U.S.A. as a whole—and I don’t want to steal her thunder by copying it here.
Plus, she made a strong case for investing in the No. 1 distributor of Pokemon games and collectibles in the world! If you’re looking to profit from this mass-market phenomenon, it might be wise to avoid the obvious (Nintendo), and place your bets at the side door, where the crowds are not flocking—yet.
So, if you have any interest in the prospect of investing in Goldman Sachs, or in profiting from the Pokemon GO madness (I mean that in a good way) or even in reading some passionate opinion on Dodd-Frank repeal, you can learn more here.