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Biting into Apple’s new iPhones and why we’re still underweight


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Here come the iPhones—just in time for the holiday shopping season. If you’re a diehard Apple enthusiast, you’ve seen the product release coverage: three new phones, ranging in price from the entry level iPhone XR for US$749 to the top-of-the-line iPhone XS Max for US$1,449.

For physicians, the Apple Watch might be a bit of a showstopper too. The new accessory-turned medical device comes with heart monitors that lets wearers take an electrocardiogram (ECG) they can share with doctors. It can detect and alert the user if it senses a low heart rate or atrial fibrillation. It will also be able to detect if the user has fallen down and will automatically initiate an emergency call on their behalf.

The company also announced new pricing for its older series models (the iPhone 7 now starts selling at US$499) and updates to the HomePod that will now let people search for songs by lyrics.

But the bulk, indeed the majority of Apple’s business is built on the iPhone. As of September 2017, 61.6% of all Apple’s business came from iPhone sales, with services adding another 13.1% (by comparison, Mac computers added 11.3%, iPads made up 8.4% of sales and “other products,” including the Apple Watch, came in at 5.6% of all sales).

Why we are underweight Apple

The world’s most valuable company – the company hit a market cap of US$1-trillion in early August – Apple Inc. (AAPL) makes up more than 4% of the S&P 500 Composite Index. Although we own some Apple shares, our funds are decidedly underweight relative to that benchmark. Here’s why.

Although Apple is an impressive company that is growing at a reasonable clip, they’re not what you would call a “growth” company. They’re not an undervalued company that we can buy at a discount either.

Beneath the surface of our funds we have two strategies or mandates: A growth-oriented strategy where managers purchase stocks that will grow and grow quickly, and a value-oriented strategy where our managers find companies that we can buy at a discount. Interestingly, Apple doesn’t fit neatly into either of those categories.

Although some of our fund’s sub-advisors have a cautious view of the company (demand for smartphones everywhere is on the decline), we may look to increase our holding in the future, for a few reasons.

There’s a lot to like about Apple’s business

Firstly, Apple has a robust balance sheet (they have a lot of cash on hand). They’re price-setters in the cell phone market, and even though people are hanging onto their devices for longer periods of time, even if they’re not springing $1,500 for the latest and greatest, Apple is still doing a good job of selling ancillary products and services to its loyal customer base.

Services, in fact, will likely be a growing part of Apple’s business in the future.

Our investment thesis remains that the iPhone sales will continue to grow at a steady pace in the low single digits. As phones come out with more functionality, however, bigger screens and better cameras, the need and demand for cloud storage and other ancillary services also increases.

Trade tensions between the U.S. and China should have minimal impact

Even if tariffs do make the product more expensive, it’s worth noting that such changes would impact every cell phone company – prices will go up across the board, not just for Apple users.

At this time though, it appears that the impact of trade related disputes between China and the U.S. will be minimal for Apple. So far, products identified for tariffs in this round are mainly accessories such as the Apple Watch, AirPods, HomePod speakers, as well as Apple adapters, chargers and cords (as of the moment, phones themselves are not subject to tariffs). All of these products fall mostly within Apple’s “other” business segment.

Although final resolution and implementation of proposed tariffs remains to be seen, we expect any changes that take place in this round would reduce the number of Apple products that are subject to potential tariffs.

To buy or not to buy?

It may feel like Apple iPhones have been part of our adult lives forever, but the fact is the company has only been in the business of selling us phones for 11 years now. Beyond that, Apple wasn’t a big business to consider.

Today, however, the company presents us with an interesting dilemma: to buy or not to buy? The company is a quality low growth company that happens to be the largest in the world, so when Apple stock goes on a tear, those who aren’t invested will lag behind the rest.

For that reason and a few others we are looking at investing more in Apple Inc. shares. Fundamentally though, we are underweight Apple and will likely remain that way because the company is not expected to grow as quickly as other opportunities, and there are many cheaper, quality companies we can buy.

For more information about how Apple fits in your portfolio, or any other investment related questions, please don’t hesitate to reach out to your MD Advisor. 

Craig Maddock

CRAIG MADDOCK, CFP, CFA, CIM, MBA, is Vice President with the Investment Management team at MD Financial Management. He leads the team of portfolio managers and investment analysts responsible for managing the firm’s mutual funds and investment pools.


About the Author

CRAIG MADDOCK, CFP, CFA, CIM, MBA, is Vice President, Senior Portfolio Manager and Head of the Multi-Asset Management team at MD Financial Management. He leads the team of portfolio managers and investment analysts responsible for managing the firm’s mutual funds and investment pools.

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