MacNicol’s Monthly Commentary-December 2018

Back on August 4th, 2018 Apple became the world’s first Trillion-dollar company and no that isn’t a typo. Putting Apple’s peak in perspective was easy: line up seven companies the size of Toronto-Dominion Bank and toss in a small sized insurance company for good measure and you pretty much had your comparison. To me the peak valuation in Apple’s stock (which accelerated even higher until October) represented the beginning of the end, and ratios or complex financial models had nothing to do with my view. The MAAM investment team on the other hand is obsessed with complex financial models but mainly we are convicted in our time-tested process of safe harbour investing. So, our decision to buy shares of Microsoft in client portfolios proved to be the safer bet to make. So, what went wrong with Apple? Well let’s first look to an account from the Wall Street Journal then I will fill you in on my take. The Wall Street Journal warned that Apple cut production over the past several weeks for all three of the new iPhone models.

“Lower-than-expected demand for Apple’s new iPhones and the company’s decision to offer more models have created turmoil along its supply chain and made it harder to predict the number of components and handsets it needs”.   – Wall Street Journal

Apple is still a gigantic company, but the stock has lost around $85 billion in market capitalization since it peaked at an eye watering $1.121 Trillion on October 3rd, 2018. To put $85 Billion in perspective is easy too: find every single last share of Starbucks and you’ll have found $85 Billion.

We do think that demand issues are finally catching up to a stock whose valuation seemed to know no upper limit. Apple had saturated consumers with its products and muscled out further price increases in the iPhone and other iProducts.

We also noticed that Apple recently ceased reporting unit sales or made them so darn hard to find that people with Engineering Degrees or CFAs were kept in the dark. A “unit” is a product line of which Apple has four: iPhones, iMacs, iPods and iPads (i.e. phones, personal computers, music players and tablets). If a macro narrative presaged slowing demand for some of the world’s most important consumer products, then I think investors have a right to know. Sure, some investors will want to focus on the “big picture” and that’s not a bad thing but those same investors shouldn’t forget that it’s really the iPhone and not some music player I wear around my wrist whilst jiggling down the road on my run that took this company to a trillion dollars in the first place. One perceptive Doctor client of ours in the West end recently inquired about whether the pull back in Apple’s share price [a solid fifty bucks] represented a good entry point. It may very well be but as we have opined before the job of a Portfolio Manager is not to provide unflappable clairvoyance its getting a strong understanding of what matters to you and your family and what types of risk you can take. Still when asked a question we respond and in this case a picture is worth a trillion words. Technically Apple has been beat up badly, so the charts don’t exactly signal to us an “all clear”. Moreover, untold numbers of gigantic hedge funds and ETFs that have exposure to this broken-down tech giant could have selling programs in place that may last months. Whether protecting year-to-date gains or taking an end-of-cycle view, the brain trusts in New York, Greenwich and London are likely poised to dish out more pain on the stock.

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MacNicol Monthly Commentary December 2018


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