Apple Shines But Broader Market Stumbles
Guy Kawasaki is a Silicon Valley celebrity. More like a god, actually. About six years ago, I interviewed Kawasaki at the New Media Expo in Los Angeles, a trade show devoted to technologists and web designers. If you’ve never been to one of these expos, they’re a cross between a Star Trek convention and a punk rock concert.
Kawasaki is a marketing specialist, author and venture capitalist. While working at Apple (NSDQ: AAPL) in the 1980s, he spearheaded the marketing of the Macintosh computer line.
I stay in touch with Kawasaki; his insights into technology are invaluable. I thought of him today, as I surveyed the latest operating results of Apple.
Last night after the closing bell, Apple released fiscal second-quarter operating results that beat expectations on the top and bottom lines. With a market cap of $895.9 billion, Apple is the world’s most valuable publicly traded company, serving as a bellwether for not just the technology sector but also the economy.
AAPL shares jumped 4.42% today. However, fears about a trade war and rising interest rates spoiled Wall Street’s mood. The Dow Jones Industrial Average, the S&P 500 and even the tech-heavy Nasdaq all closed in the red.
The Federal Reserve’s Federal Open Market Committee (FOMC) ended its two-day meeting today by announcing that interest rates would remain unchanged for now, but intimated that stirring inflation would warrant a rate hike in June.
Lingering trade tensions also weighed on stocks. European Commission President Jean-Claude Juncker said on Wednesday the European Union rejects pressure from President Trump to make concessions on tariffs. The EU is deeply puzzled as to why the president would pick trade fights with America’s allies in Europe.
Apple’s quarter comes to fruition…
Apple’s second-quarter earnings per share (EPS) came in at $2.73 versus consensus expectations of $2.67. A year ago in the second quarter, Apple’s EPS reached $2.10 on revenue of $52.9 billion. Earnings were $13.82 billion, up from $11.03 billion in the same year-ago quarter.
Apple’s revenue reached $61.10 billion compared to the expected $60.82 billion. The firm issued healthy fiscal third-quarter revenue guidance of $51.5 billion to $53.5 billion, compared to the expected $51.61 billion.
Unit sales of the iPhone were soft, coming in at 52.2 million vs. the expected 52.54 million, but they still racked up year-over-year growth. Apple also announced major investments in advanced manufacturing as well as $100 billion in share buybacks, fueled by the U.S. tax cuts.
The past few months, I’ve heard many analysts cite the obituary of the Cupertino, California-based giant. They’ve said the iPhone market is saturated, that Apple can’t sustain its fast pace of growth, that cheaper smartphones from overseas will decimate the company’s market share… yada yada yada.
They got it dead wrong. Apple commands powerful brand loyalty around the world, as it continues to invest in top-notch engineers and marketers.
Something Guy Kawasaki told me comes to mind right now: “Defy the crowd. The crowd isn’t always wise. It can also lead you down a path of silliness, sub-optimal choices, and downright destruction.”
Indeed, contrarianism is a guiding principle of Mind Over Markets. Despite the increasing prevalence of algorithmic trading, markets are still governed by human beings, who in turn are driven by fear, greed and other emotions that cloud judgment.
If there’s a common thread to my daily column, it’s to buck the conventional wisdom. To cite Apple’s familiar slogan: Think different.
Wednesday Market Wrap
- DJIA: -0.72% or -174.07 points to close at 23,924.98
- S&P 500: -0.72% or -19.13 points to close at 2,635.67
- Nasdaq: -0.42% or -29.81 points to close at 7,100.90
Wednesday’s Big Gainers
- HC2 Holdings (NYSE: HCHC) +34.53%
Company sells biotech holding from portfolio.
- Community Health Systems (NYSE: CYH) +28.09%
Hospital operator exchanges $3.1 billion in debt.
- Harsco (NYSE: HSC) +10.22%
Industrial firm reports strong earnings.
Wednesday’s Big Decliners
- Esperion Therapeutics (NSDQ: ESPR) -35.11%
Test of biotech’s drug shows high mortality rates.
- Stratasys (NSDQ: SSYS) -10.07%
Maker of 3D printers disappoints on earnings.
- Encore Wire (NSDQ: WIRE) -7.27%
Wire and cable provider misses on earnings.
Letters to the Editor
“You assert that stocks remain overvalued, but earnings projections for the S&P 500 are solid for this quarter. Won’t earnings growth be sufficient to keep stocks moving higher?” — Richard C.
The consensus expectations for year-over-year earnings growth for the S&P 500 this quarter stand at a strong 18.3%. But be forewarned, the cyclically adjusted price-to-earnings ratio (CAPE ratio) currently stands at 31.55, compared to the median of 16.15.
Take a look at the following chart, which depicts CAPE ratio readings of the S&P 500 since 1900. I used data compiled by Professor Robert Shiller of Yale University, the inventor of the ratio. The middle line represents the 97th percentile of readings:
This chart tells us that the stock market has been more expensive than today’s valuation only about 3% of the time and it has been cheaper about 97% of the time.
I’m reminded of this pronouncement from Alan Greenspan in 2000, when he served as chairman of the Federal Reserve:
“The three- to five-year earnings projections of more than a thousand analysts, though exhibiting some signs of flattening in recent months, have generally held firm. Such expectations, should they persist, bode well for continued capital deepening and sustained growth.”
But instead of going up and up, as Greenspan predicted, the market fell and fell. And then fell some more.
Greenspan’s expectations turned out to be so wrong, he later admitted that his essential beliefs about the market, patterned after the laissez-faire philosophies of Ayn Rand and Adam Smith, were shaken to the core. It was a startling admission for a powerful man once seen as virtually infallible. Remember this history lesson, the next time the financial media fawn over a Fed chief’s pronouncement.
Got questions about stock valuations? Drop me a line: email@example.com
John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.