Friday File: Two New Small-Cap Buys in Hated Businesses, Two (partial) Big Tech Sales

Extended Warranties, Marijuana Vape Pens, Overvalued Tech Stocks and more...

By Travis Johnson, Stock Gumshoe, September 20, 2019


Let’s start with some selling this week, a mix of profit taking and stop-lossing for you…

I sold a bit more of my Apple (AAPL) position today, as it tickles the $1 trillion level of market capitalization (and the only company as large is now Microsoft… who would have thought, decades after the rivalry began in an industry famous for destroying incumbents and bringing radical change, that Apple and Microsoft would stand as the largest companies in the world in 2019?)

Why? It seems to me that there is something increasingly speculative about the iPhone maker as we get five or six quarters in to this “new era” of relatively flat (or sometimes declining) revenue and declining earnings, with the stock getting close again to all-time highs and trading at what I consider a pretty rich valuation.

The question is, do we have another surge of growth ahead next year thanks to a 5G iPhone “reinvigorating” the upgrade cycle? Will services like Apple TV+ and Apple Music and their other initiatives grow fast enough to make a difference if they lose Chinese customers? I don’t know… but Apple is no longer insanely stuffed with cash, so the pressure could hit the shares if they have a bad year next year and don’t have the flexibility to buy back another $100 billion worth of shares.

The positive spin is that 5G will reinvigorate iPhone growth, which is still by far the most important line of business for Apple, and that they still have a very strong balance sheet ($95 billion in cash and equivalents, $116 billion in long-term investments, $110 billion in debt) and are growing the dividend (albeit slowly).

The negative spin is that they’ve bought their earnings per share growth in recent years by reducing the share count with debt-fueled buybacks, and the stock is no longer cheap. It was certainly cheap for many years, I bought a lot of my AAPL shares at less than 10X earnings (ex cash, at least), but it’s not now, and the expectations are growing pretty dramatic that next year will be a barn-burner… which is possible, but certainly not guaranteed. I think there’s just as much room for possible disappointment in a 2020 5G iPhone as there is for ebullience, particularly because of competition out side the US, so I’m on the fence… and I think the ...

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