Apple’s weighting in the Russell 1000 is expected to be increased after the index is reconstituted. As a result, Bernstein analysts think Apple Inc. (NASDAQ:AAPL) stock could get a boost because growth managers might be inclined to increase their positions in the company.
Positives about Apple stock
In a report dated June 23, 2014, analysts Toni Sacconaghi, Jr., Eric Garfunkel and Jonathan Cofsky say they have five main reasons to be so positive on Apple Inc. (NASDAQ:AAPL) in the near term. First, they note that the company’s stock depends heavily on anticipation surrounding product cycles. Investors are expecting a bigger iPhone 6 and an iWatch, which would be Apple’s first new category in four years. The Bernstein team thinks that both of these products will continue to drive investor anticipation heading into the new product cycle.
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Second, they think growth managers as a collective are underweight on Apple Inc. (NASDAQ:AAPL). They believe these managers will close the gap ahead of the iPhone 6 launch. Third, they say the recent seven for one stock split could “broaden retail interest in the stock.” Fourth, they see very limited risk to Apple Inc. (NASDAQ:AAPL)’s June Estimates, and fifth, they think Apple stock is “attractively valued.” It’s currently trading at nine times enterprise value to free cash flow.
At the end of last month, Bernstein analysts updated their price target for Apple Inc. (NASDAQ:AAPL) to $100 per share. They also explained that even though the stock has performed very well since the end of January, they remain bullish on it. Apple stock is up 17% relative to the S&P 500.
How the Russell 1000 could affect Apple
The analysts note that the Russell 1000 index will be reconstituted at the end of this month. At that time, it’s expected that Apple Inc. (NASDAQ:AAPL)’s weight in that growth index will rise from 4.1% to 5.3%. They believe this will push growth managers to increase their stakes in Apple, especially those who have been “notably underweight” on the company’s stock.
At this point, Apple Inc. (NASDAQ:AAPL) makes up 2.8% of the market weighted Russell 2000 index. It’s split with 76% in the Russell 1000 Growth index and 24% in the Russell Value index. This means Apple is 4.1% of the Growth index and 1.4% of the Value index. It’s expected that the company will move entirely to the Growth index, vacating its position in the Russell Value index.
Will growth managers raise their Apple stakes?
The Bernstein team notes that it’s rather difficult to tell how many “benchmark sensitive growth managers” have already raised their positions in Apple Inc. (NASDAQ:AAPL). However, they said at the end of last month, their analyst suggested that many U.S. large-cap mutual funds with more than $1 billion in assets under management were “notably underweight” on Apple. They said at that time, the general overall weighting was 1.8% and the weighting was 2.8% if they owned Apple at all. Both of those are significantly lower than Apple’s 4% weighting in the growth index at that time.
The analysts think that when Apple’s weighting in the Russell Growth index increases, fund managers could feel pressured to buy more shares, particularly because they see the potential for significant revisions in earnings and because investors are anticipating this fall’s product launches.