There are moments when the popular notion of equity investing revolves around one company. Right now that stock is Apple.
Thanks in part to its gain of more than 40 per cent so far this year, Apple has become a superheavyweight in the U.S. equity market. Indeed, it is the world’s most valuable publicly listed company.
Its shares account for 4.3 per cent of New York’s benchmark S&P 500 index and more than a fifth of the S&P’s technology sector. Its recently announced plans to pay a dividend have made it a widely held stock. In fact, without Apple, the S&P 500’s gain of 8.7 per cent so far this year would be a more modest 7.4 per cent.
Not since 1999, when Microsoft contributed 14 per cent of a 10 per cent rally in the S&P 500, has a company exerted such influence over the wider market. Apple’s weighting in the S&P has rarely been achieved, let alone held for long. Exxon Mobil was the last company to have such sway, in April 2008.
“Every once in a while a company becomes more than 4 per cent of the index and that’s rarefied air and doesn’t last long,” says Jack Ablin, chief investment officer at Harris Private Bank.
With equities now facing stronger headwinds - high energy prices, more mixed economic news and a revival of eurozone debt crisis fears - any sense that Apple may not be able to sustain its runaway earnings momentum could drag on sentiment, given the company’s influence.
“Just like any mountain, when you get to the top, there’s a long way down the other side,” says James Dailey, chief investment officer at Team Financial Managers. TFM’s mutual fund portfolio includes options to sell Apple shares in May and July at $510, some way below Monday’s close of $571.70.
Before Apple’s fiscal second-quarter results, due after the closing bell on Tuesday, the stock has dropped more than 10 per cent since peaking at a record $644 this month. Having stunned investors in January with a record earnings result, the onus has been on Apple to outperform heightened expectations.
Nervousness has been growing and the share price has swung sharply since hitting that record high. While the company has a long history of beating forecast results and is expected to contribute twice as much to earnings growth for the S&P as any other company this quarter, some investors have been reducing their exposure.
Mr Ablin, for example, says the bank has a 5 per cent limit on any one stock in its portfolio and has scaled back its Apple holdings as the stock has surged this year.
Oliver Pursche, portfolio manager at Gary Goldberg Financial Services first bought Apple shares for his portfolios in 2009 and has recently sold some of the companies’ shares.
“It’s not just a question of price,” he says. “I can see Apple hitting $520 but until broader markets signal an improvement in risk appetite, I won’t necessarily jump in.”
One long time Apple shareholder, Aswath Damadoran, a New York University professor, cashed in his holding after 15 years, arguing that the stock had become a “momentum” play, with investors behaving as a herd rather then looking at the company’s fundamentals
Among investment analysts, there is a fear that Apple’s prominence in the rally may make the market, and the technology sector in particular, vulnerable. Technology stocks account for more than a fifth of the S&P 500 for the first time since the dotcom bubble burst more than a decade ago.
However, analysts also point to big differences between now and the dotcom boom. Apple’s shares are trading at just over 16 times trailing 12-month earnings. In 1999 the equivalent ratio for Microsoft was 75 times. Cisco’s price/earnings ratio peaked at 187 in 2000.
“It’s not 1999, not by a long shot,” says Eric Slover at Barclays.
Nevertheless, despite its solid fundamentals, a big concern is that Apple’s ubiquity in investment products could amplify the effect of any price falls. Apple shares comprise 2.7 per cent of the portfolios of the world’s 200 largest hedge funds, according to FactSet, more than twice as much as any other single stock.
Bloomberg data show Apple is also held by small-cap funds, while international funds, which are meant to seek exposure to non-U.S. equities, are also major holders.
“If things sour for Apple, it will put a big dampener on the overall market,” says Mr Ablin.