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 Amid concerns that iPhone sales may be set to drop, the $77.3
billion American Funds Capital World Growth & Income Fund <CWGIX.O>
has sold all of its 1.7 million Apple shares since the end of June,
according to Lipper data. The $9.3 billion Hartford Capital
Appreciation Fund <ITHAX.O> sold 1.4 million shares over the same
period, reducing its position by 91 percent.
The selling of Apple stock by growth-oriented managers, who seek
higher returns from fast-expanding companies, pushes Apple further
toward being a so-called value stock – more appealing for its
balance sheet or cash than its growth prospects.
Investors see Wall Street's expectations of fewer phone sales this
year as a reflection of a maturing U.S. smartphone market and the
economic slowdown in China, where Apple has been deriving most of
its growth.
They were jolted when Taiwan-based iPhone assembler Hon Hai
Precision Industry Co – commonly known as Foxconn – said its revenue
fell by a fifth in December, one sign that iPhone demand could be
slowing.
The massive manufacturer also plans to cut worker hours over China's
week-long Lunar New Year holiday in February, a period when it
previously had often paid overtime, a source familiar with the
matter told Reuters.
Wall Street analysts expect Apple to grow revenue by just 4 to 7
percent in the current fiscal year ending next September – down from
28 percent the year before, according to Thomson Reuters data.
The slowdown concerns have helped to drive Apple's shares down
almost 29 percent to $95.98 late on Friday morning, from last
April's peak of $134.54.
"The upside from the phone segment, which is what has carried them
for several years, is becoming more limited,” said Tony Arsta, a
co-portfolio manager of the growth-oriented Motley Fool Great
America Fund, which sold all of its Apple shares – 2 percent of its
assets – over the past six months. “They were able to juice it by
introducing a bigger screen, but all the easy decisions have played
out."
Apple did not respond to requests for comment for this article.
VALUE STOCKS AND ACTIVIST INVESTORS
The transition of Apple to more of a value than a growth investment
is underway at funds giant Fidelity.
Its growth-oriented Fidelity Capital Appreciation fund has sold all
of its 2.48 million Apple shares since June, according to Lipper
data. At the same time, the value-oriented Fidelity Series
Equity-Income fund bought 1.05 million shares after having no
previous stake, and making it one of the ten largest buyers in the
second half of last year.
The Fidelity, American Fund Capital and Hartford Capital growth
funds were among the ten largest sellers of Apple over the last six
months of 2015. Fidelity did not respond to requests for comment and
both American Fund and Hartford Capital declined comment.
Value fund managers are more likely to take an activist role,
criticizing management and pushing for share buybacks, dividends, or
restructuring to deliver shareholder returns because a company is
not growing quickly enough to raise its share price, said Todd
Rosenbluth, director of mutual fund research at S&P Capital IQ.
Apple has already seen activists move in. Billionaire investor Carl
Icahn wrote a letter to Apple's board in October 2014 calling the
company "dramatically undervalued" and urging a bigger share buyback
program and a dividend increase.
The company increased its share buyback program by 50 percent in
April 2015, with plans to buy back $140 billion in stock by March
2017. It also increased its quarterly dividend by 11 percent, to 52
cents per share.
According to the most recent disclosures recorded by Lipper data,
Icahn is the company's fifth-largest shareholder, with 52.7 million
shares worth approximately $5.8 billion.
TRANSITION CAN BE DIFFICULT
Apple already resembles a value stock by some measures. Shares trade
at a trailing price-to-earnings ratio of about 10.5, based on
earnings in its last fiscal year. That compares with a P/E of 95 for
the fast-growth stock Facebook Inc <FB.O>.
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Overall, 41.4 percent of growth funds hold Apple, a decline from
47.2 percent at the end of 2012, according to Lipper. Apple is held
by 20.1 percent of value funds, up from 13.9 percent over the same
period.
Companies that transition from growth to value stocks sometimes see
share prices stagnate for long periods. Microsoft, a favorite during
the late '90s tech bubble, fell below $40 per share in July 2000 and
did not trade above that price again for almost 14 years. Still,
some growth-oriented managers are holding their Apple positions.
John Barr, portfolio manager of the Needham Aggressive Growth fund
<NEAGX.O>, has not reduced his 5 percent weighting in the company.
He expects slower but steady growth.
"The law of large numbers is happening,” he said. "But nothing is
dramatically broken with the iPhone market, and we think Apple is
going to continue to be the innovation leader driving it forward."
David Chieuh’s Upright Growth Fund <UPUPX.O> has a larger share of
Apple – 21.2 percent – than any other fund.
His fund was down 4.4 percent over the three months through
Wednesday, partly because of Apple weakness, but it has outperformed
the S&P 500 over that period.
Apple stock could fall another 10 percent before stabilizing, Chieuh
predicted, but lower prices will make it more attractive –
ultimately bringing in more buyers and lifting its share price.
Some investors are hoping that the biggest breakthrough product in
Apple’s future will be a car – possibly an electric vehicle,
suitable for car-sharing. The company has never fully acknowledged
it has an automotive project, but the company has recruited dozens
of experts from automakers.
For now, though, the lack of another big hit weighs on the stock
price. Some of the recent decline stems from disappointment with the
Apple Watch, which was launched last year, said Graham Tanaka,
portfolio manager of the Tanaka Growth Fund <TGFRX.O>.
"People thought it would be the next big thing, and it's only an
okay product," he said.
Still, Tanaka is maintaining his Apple holdings because he expects
the company to expand its line of smart products for the home –
similar to Alphabet's Nest line of products – including Wifi-enabled
thermostats and home security cameras.
Such new products can increase dependence on the iPhone. In June,
the first products compatible with Apple’s HomeKit software were
launched, allowing users to tell the iPhone voice-assistant Siri to
turn on lights or open door locks.
Hedge fund manager Morris Mark, managing partner at Mark Asset
Management, meanwhile, is looking for Apple to sign deals with media
companies such as Walt Disney Co <DIS.N> to stream more of their
live content through Apple TV, allowing consumers to cut their cable
subscriptions.
That, in turn, would prompt more consumers to opt for an iPhone to
manage and control their content libraries, he said.
"Nothing in the world is more important to Apple than the iPhone,"
he said.
(Reporting by David Randall; Editing by Brian Thevenot and Martin
Howell)
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