Apple is back but questions remain

by admin on June 4, 2014

AppleOn September 21, 2012 Apple reached $700 per share for the first time, only to go back down to $390 six months later. The company has had a fantastic run since 2010, but its current price of $628 is still under the $700 of those glory days in 2012. Apple invests huge amounts of money in research, design and development, but it seems that the company may now suddenly be suffering from the perfectionism syndrome. This was the syndrome that killed Duke Nukem, one of the best games of all time.

The original Duke Nukem game was so successful that the team unrealistically committed to creating the perfect sequel – a sequel that unfortunately never saw the light of day. George Broussard, one of the owners of 3D Realms, the creator of the game, forced his team to re-start from scratch every time a new gaming technology was available (which at the time seemed to be almost every day). After Broussard and his partner Scott Miller had spent $20 million of their own money over a span of 12 years, they disbanded all development at 3D Realms in 2009. In the quest for the perfect sequel to an original game released in 1996, nothing was ever released.

This is one of the most interesting stories of success paralysis in recent history.  A similar challenge seems to be plaguing Apple lately. It’s not clear whether they are perfecting the Apple TV or Apple smartwatch, but something is clearly in the works. Is Apple waiting for the perfect moment that may never arrive? In contrast to 3D Realms, Apple is one of the largest companies in the world, and while I don’t think they are going anywhere anytime soon, they do risk stock stagnation if innovation and product launches stop (Don’t believe me? Just asked Bill Gates). In November 2012, I reduced my position in Apple ahead of business expenses and increasing competition, but even after that slight reduction, the stock still comprises 9.6% of my entire portfolio. In May, Apple was my best performing position with a 7.3% gain.

Although Apple is getting back on track, many questions remain. Will Apple really be able to launch a game-changing product again? iTunes radio was a complete fiasco. It never got better, it was difficult to use and glitchy, was years behind of rdio, Spotify or even Pandora. I just cancelled my subscription and moved on to a different service. I am curious to see what develops after their recent acquisition of Beats – especially since Apple is a company that hasn’t done a lot of large acquisitions in the past. I’m still invested in Apple for the long run, but since questions remain I plan to keep a close eye on it.

Summary Portfolio Performance

Since inception (01/19/12), the model is up 47.5%, versus the S&P 500 54.8%. The return of the S&P 500 in May 2014 was 2.1%, as compared with 1.96% for my Dividend Paying Large Caps portfolio. Year-to-date my portfolio is up 6.19% as compared with 4.07% of the S&P 500.

In May, Apple (AAPL), JC Penny (JCP), and American Express (AXP) all performed very well. They were up 7.3%, 5.5%, and 4.7% respectively. The stock that hurt my portfolio in May was actually one of my recent acquisitions: Pfizer (PFE), which declined -5.3% after the failed $117 Billion bid for Aztra Zeneca. At 18.11 PE and 3.5% dividend, Pfizer is a position I’ll hold for the rest of the year despite this hiccup in May. Pfizer is one of the large cap companies with more aggressive stock buyback programs, which shows management responsibility and commitment to investors. The link below shows how much Pfizer has spent in stock buybacks since 2010.

PFE Chart

PFE data by YCharts

Acquisitions in May 2014

In May 2014, I added two positions to my portfolio. Lukoil (LUKOY), a Russian company engaged in the exploration, production, refining, marketing and distribution of crude oil and petroleum products. In March Russian stocks took a hit after President Barack Obama said the U.S. was considering sanctions against key economic sectors in Russia (including financial services, oil and gas, metals and mining and the defense industry) if Russia made military moves into eastern and southern Ukraine. Given this context, I would call this an opportunistic investment on my part. LUKOY is also paying a healthy dividend of 4.14%. Once the Russian crisis ends, I expect this stock to head up to the mid $60s very quickly.

The other position I added to my portfolio was also an opportunistic trade. Ralph Lauren (RL) has been down -13.25% this year along with the apparel manufacturing industry as a whole. Other house brands such as Aeropostale (ARO), and Guess (GES) have been trending down as well in 2014. RL pays 1.17% dividend and has very little debt. Debt to Equity Ratio (Quarterly) is only 0.0744. I believe declines in sales are due to tough economic times and shifting market trends, which will return to normal sooner or later.

Liquidations in May 2014

I closed two positions because I believed there were better opportunities in the market.  While I think these companies were worth holding, I found some undervalued jewels with better upside potential. The positions I liquidated in May were Qualcomm (QCOM) and US Bancorp (USB). If all things stay equal in June, I won’t be liquidating any other positions. I am comfortable with the 12 stocks I currently hold in my portfolio and am sincerely expecting to beat the S&P 500 in June.

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