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The Market Is Worried, and Among Those Worries Is Apple

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

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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.
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Isaacman and/or his clients own QQQ and RTR.
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