The Market Is Worried, and Among Those Worries Is Apple

By Max Isaacman  JAN 02, 2013 3:36 PM

The biggest problem seems to be that Apple is not getting investors excited enough about future prospects.


MINYANVILLE ORIGINAL Market sentiment does not seem to be frothy, but rather seems pretty sober. Take the case of Apple (NASDAQ:AAPL). Investors and traders have dumped Apple, sending it down about 15% from its recent high. Apple’s worst transgression is that it is not exciting people enough about its prospects. Some people and pundits are even complaining about the attitude of its salespeople in its stores. This fear and skepticism about the company and its products seems overblown; instead of acknowledging the good things about Apple, including its sales and earnings, people are trashing the company. Apple can do nothing right, it seems.

This seems more a symptom of a market seeking out opportunity than anything being wrong with Apple. Money is flowing into stocks in emerging markets, Japan, small-cap emerging markets, and other asset classes that have been overlooked in the recent market advances. Apple looks like a value stock with potential growth -- maybe not dynamic growth as in the past, but consistent growth, and maybe even strong growth. The stock sells at a reasonable multiple, about 9.22 times next year’s earnings, its PEG ratio is low at 0.52, vs. a PEG 1.04 for the sector, and is estimated to grow for the next five years at 20%, vs. 18% for the sector. Apple has a lot of cash and great products, and its retail outlets do a good job of being generally helpful and informative. Whether or not Apple can continue with a river of amazing new products stands to be seen. But the negative attitude that Apple’s day is behind it seems to be a bear argument that is not the whole picture. Apple and the tech sector could perform well in 2013. 

A way to avoid being wholly reliant on AAPL, and a way to get Apple exposure while also getting diversified tech sector exposure, is to buy the Nasdaq-100 ETF (NASDAQ:QQQ). QQQ has a diversified portfolio of growth stocks that is mostly exposed to technology. The methodology of picking stocks to include in QQQ is simple: QQQ holds the biggest non-financial companies that are listed on the Nasdaq (INDEXNASDAQ:.IXIC). There are certain stipulations so that relatively unseasoned companies will not be included -- for example, Nasdaq usually does not list companies that have just gone public, and stocks in the index must have had an average daily trading volume of 100,000 shares per day. The other sectors that QQQ holds in a significant way are consumer cyclicals and health care.

Because of the way the index is composed, when a company stops growing or its growth slows down, that company will get a lesser weighting on the exchange. QQQ is a modified cap-weighted index, meaning that the bigger the company, the more weight it has in the index, but it is modified so that no company can completely dominate the index. Apple has about a 20% weight in the index so a 5% move in Apple would be about a 1% move in QQQ, making a holder in QQQ somewhat hedged against the volatility of AAPL, both on the upside and downside.

Another way to have AAPL exposure without being overly exposed to its volatility, and to also have tech sector exposure, is to buy an equal weighted Nasdaq-100 Index ETF, such as the First Trust Nasdaq 100 Equal Weighed Index Fund (NASDAQ:QQEW). An equal-weighted methodology allows smaller-sized and middle-sized companies to have more weight in the index, which will affect the index performance. The heavier weighting in smaller companies may also cause more volatility in the ETF. If you want growth and don’t like tech so much, you could consider buying the fastest growing companies on the Nasdaq market, without the tech component. The First Trust Nasdaq 100 Ex-Technology Sector Index Fund (NASDAQ:QQXT) has all the non-tech stocks that are in the Nasdaq-100 (INDEXNASDAQ:NDX). Its biggest weightings are in the consumer services and health care sectors, and the industrial and telecom sectors also have significant exposure. QQXT is equal weighted.

Emerging Markets Offer Growth Potential in 2013.

Emerging markets have been good performers and this should continue into 2013. There have been good market performances in China, in the China small caps, in Russia, and in other emerging markets. Current dividend yields for emerging markets indexes are in one of their high dividend yield periods, according to WisdomTree’s Jeremy Schwartz. Schwartz’s group studied 23 calendar years and found that 2012 ranks as fourth of the high dividend years. These periods were historically associated with higher performances in the following calendar year, which is positive for the performance of the emerging markets in 2013.

One interesting ETF that contains China and also contains companies in the developed countries of Europe is the RevenueShares ADR Fund ETF (NYSEARCA:RTR). The portfolio is an interesting mix of value and potential growth, since it contains an underperforming asset class, which is Europe, and the growth at a reasonable price asset class, which is China. These asset classes have been laggards are selling at low prices, considering their valuations. At 11 times earnings, RTR doesn’t seem expensive, and it has a ROE of 11%, and a low valuation of 0.55% price to sales ratio. It pays a dividend of 3.64% as an added bonus.

RTR is comprised of the same stocks that are in the S&P ADR Index (INDEXSP:SPADR), which contains the non-US companies that are in the S&P Global 1200 Index (INDEXSP:SPG1200). RTR has a weighting of 25% United Kingdom, 13% Japan, 12% China, and 9% Canada, followed by a mix of mostly developed countries. The developed countries have not performed in years, and could be due for a rebound. China still has a high growth rate, though not as high as previously, and Japan has lagged for many years and many investment managers think companies in the country are ready to start growing again. The ETF has performed well over the last six months, and has beaten many benchmarks.

Editor's Note: Max Isaacman is the author of Blizzard of Money, Winning with ETF Strategies, Investing with Intelligent ETFs, How to Be an Index Investor, and The NASDAQ Investor.
Isaacman and/or his clients own QQQ and RTR.