I wrote more articles about Apple than almost any other company over the last five years. For a long time it was one of the most hated stocks on Wall Street, and when we bought it for the first time in 2013, an outraged client wrote me an email calling our purchase “irresponsible” – which motivated me to write not just one but two articles on Apple (one, two). As I discuss in the following article, for a value investor it is easier to love stocks that are hated and more difficult to love stocks that are loved. Love is usually expensive, and the infatuation gets reflected in a company’s valuation. Hate, or near hate, is cheap.
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Being contrarian – taking a position that goes against the grain of commonly held opinion – is not easy and not comfortable. Humans take comfort in consensus. We love it when the crowd agrees with us. However, being contrarian for the sake of being different is idiotic and dangerous. People don’t normally step in front of moving trains; being contrarian in this regard would make little sense. When it comes to investing, being contrarian means trusting and following through on the findings of your research, whether you agree or disagree with the crowd.
Bucking the crowd is rarely comfortable even for seasoned contrarians. Think of it this way: Brave people are not the ones who don’t have fear but the ones who can overcome it. When you’re making a contrarian decision, it’s not like you won’t have a tingly, discomfiting feeling in your stomach. You will. This is the time when you need to have a healthy dose of arrogance; yes, this is when you need to stick with your research and basically say “The crowd is wrong; I am right.” I have talked plenty of times about the situations in which you need to be humble, but there are times you need to be arrogant, too. And the tricky part is to know when to be which.
Recently, I felt the same tingly, uncomfortable “contrarian” feeling when we were selling the bulk of our Apple stock as I did in 2013 when were buying. Then we could not kill the stock; today … we can.
I shared a draft of the following article with a friend. He said “You’re probably right, but Apple is going to $180 first.” There is little value I can add there. Let me tell you where I could be wrong: India may prove to be a very fruitful market for Apple. iPhone penetration there is very low, Apple is building new stores, and India has a billion-plus people. The problem with this argument is that India is a very poor country. Half of its population doesn’t have indoor plumbing, and a third doesn’t have electricity. Therefore, for a long time, Apple will be an aspirational brand for a very large part of the Indian population.
I think 5G – which will allow much faster downloads – may end up creating another super upgrade cycle for iPhone. Augmented reality – AR – may be another driver that I am underestimating. The iPhone may turn into a delivery device of earth-shattering innovations for Apple. Also, Apple may come up with incremental innovations that keep people excited about iPhone, and the upgrade cycle will remain stable. I say all this and then I look at my three- and four-year-old iPads. Newer versions are thinner, have faster processors, better screens, etc. The ones I have are just good enough. When will iPhone reach this “good enough” point? Don’t know.
China. Well, China is supposed to a growth engine for Apple, but that may or may not be the case. WeChat is a huge problem for Apple. Someone described WeChat to me as a Chinese version of Facebook plus WhatsApp. The more I learn about it, the more I realize it is so much more than that. It is basically “the mobile internet” in China. People turn on their phones, jump on WeChat, and don’t have to go anywhere else. It’s Facebook and WhatsApp, but it’s also an app and game store, payment platform, Yelp, and a whole lot more. From a mobile phone perspective, WeChat is an operating system layer on top of iOS or Android. If you are a WeChat user, you don’t really care about any improvements in the underlying operating system, because you barely use it. Samsung comes out with a new, spiffier phone a year now, and your switching “inconvenience” costs are almost zero. WeChat basically kills iPhone user loyalty and the recurrence of revenues that Apple masterfully developed in the West.
A more expensive iPhone will boost Apple’s earnings, but it will surely have an unintended consequence: It will likely elongate the upgrade cycle.
Next week, with the introduction of the shiny new i-Object, will definitely be exciting; and as an Apple junkie (I own so many Apple products it’s almost embarrassing) I’m excited for Apple. But I’m less excited about Apple stock than I’ve been in years, and the current valuation demands more clairvoyance than I possess.
So, how does one invest in this overvalued market? Our strategy is spelled out in this fairly in-depth article.
Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley) and The Little Book of Sideways Markets (Wiley).