A lot of people missed buying Apple in the $160s last quarter or sold Facebook while Mark Zuckerberg was testifying before Congress. One of my managers, John Archer, expertly used the volatility in Apple to add to his long-term position and held onto Facebook when it was in crisis. Here’s what kept John on the right side of the trade.
Ken Kam: John, you bought Apple in April at $166 when Wall Street was in a panic. The stock is trading now at $191. What made you pull the trigger?
John Archer: It’s been gratifying to see my thesis on Apple play out over the past few months.
At the time, it appeared that Wall Street was over-reacting to what was thought to be a reduction in the number of iPhones sold, which would in turn affect the company’s revenue growth.
Kam: What turned the stock around?
Archer: As it turned out, the company reported revenue up 16% primarily because of higher average selling prices associated with the iPhone X and significant growth in the company’s high margin services segment.
Kam: What do you expect from Apple this quarter?
Archer: The company’s second quarter results reflect several strengths that I expect to continue.
Apple’s exceptional pricing power is on full display, its customers are loyal and are buying additional Apple products (1.3 billion active devices now), it continues to innovate and enhance its sleek and appealing devices, its “ecosystem” continues to grow and strengthen, its balance sheet health and cash flow generating capabilities are incredible, the new tax laws will allow the company to continue to reward shareholders with increasing dividends (up 16% in the second quarter) and significant share repurchases, and the Apple brand is as strong and popular as ever.
Kam: Do you think Apple’s competition is catching up or falling behind?
Archer: Apple operates in a brutally competitive industry with short product cycles but management has proved to be adept at generating profit margins and cash flows significantly higher than its industry competitors.
Kam: Do you see any chance that Apple could fall back to $166 so those who missed it in April can get a do over?
Archer: Look for Wall Street to continue to be concerned about trade wars, iPhone unit volumes and lagging AI development. I have a positive long-term view on Apple and will continue to purchase more shares at meaningful dips in the price of the stock.
Kam: You first bought Facebook in November 2016 at $121. You added to your position in 2017 at $163 and again at $171. With the stock at $207 today, these were great buy decisions. Yet when Mark Zuckerberg was testifying to Congress earlier this year and the stock dropped back to $153, you held on. What made you stick with Facebook even when you were underwater?
Archer: Facebook is an incredibly interesting company. In a short period of time it has managed to attract over 2 billion users worldwide. It has skillfully monetized its platform in an advertising-only business model to create an incredibly strong financial position.
Kam: Tell me more about why you think Facebook is an incredibly strong financial position.
Archer: Its net income margin last year was over 39%, higher than VISA, Alphabet, Apple and most other publically held companies. It has no debt, has over $42 billion in cash and generates tremendous amounts of free cash flow.
Kam: Some say the reason Facebooks’ price-to-earnings ratio is just 30 is because the market anticipates increasing government regulation will slow their growth. Do you think Facebook’s best days are behind them?
Archer: Facebook is clearly in its early innings. I currently model 22% annual revenue growth over the next five years. I believe it will continue to dominate its industry for many years to come and continue to find creative ways to grow, leverage and monetize its huge user base.
Everyone wants to buy low and sell high. But not a lot of people can bring themselves to do it because when stocks are cheap, there is usually something to be afraid of.
John is not buying Apple or Facebook at the current price. However, if Facebook were to fall back to the $170 level, or Apple to the $160 level, on trade war or election fears, that would be a good entry point for new investors.
If you manage your own portfolio, do the homework on Apple and Facebook now before the market’s next panic attack. To be notified when I write about stocks you are following, click here.
John’s fund is up 8.21% for our clients at the midpoint of the year, way ahead of the S&P 500’s 2.65% return. When researching stocks the most valuable insights often come from great managers. To be notified when I write about John Archer, click here.