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This episode is called “Apple: Investing in The Stock vs. The Company”. What I mean is “don’t fall in love with a stock just because you love the company.” On this episode, you’ll learn how to separate the stock from the company, what to look for when you buy a stock and why you don’t want to judge a stock by how it’s done in the past. Today we’ll talk about what happened to Apple recently, as an example of why not to fall in love with the stock.

Apple has been battling with Google parent Alphabet as the most valuable company in the world. Their values have each exceeded $500 billion. But recently, Apple seems to be struggling to keep it’s value and that’s a result of the numbers that have come in.

Apple announced earnings a couple of days ago and missed it’s revenue target. The stock lost $47 billion in value in one day when the price declined from $104 to $97 a share.

To review why you don’t want to fall in love with a stock, we’re going to examine an excellent article about Apple in the New York Times.

According to the Times, Apple’s “13-year run of quarterly revenue growth ended on Tuesday — a casualty of Apple’s already immense size, weakness in key global markets like China and the lack of another hot product to pry open the wallets of customers.”

The Times is blaming Apple’s slower growth to 1) being too large. They do have a point. When you’re a mammoth company and worth half a trillion dollars, at some point, growth has to slow. Trees don’t grow to the sky. At some point, growth will slow down just as a function of being so large. For the last 5 years, Apple has been the world’s largest company. As time goes on, it gets tougher to hold onto that record.

The second thing the Times said is “weakness in key global markets like China”. That’s a problem because we all know, China knocks-off technology and sells the copies as though they are the real thing, siphoning revenues away from successful companies like Apple. Sales in China are down a worrisome 26%, is that due to their slowing economy or from other competition? Maybe both.

The third reason the Times said Apple’s sales are slowing is “lack of another hot product to pry open the wallets of customers” and, it also said, revenues “declined 13 percent to $50.6 billion as sales of its flagship product, the iPhone, fell, with little else to take its place.”

This has been a challenge since Steve Jobs’s departing. There hasn’t been any blockbuster new product – there’s the Apple Watch, which has done as well as the iPhone in its first year of sales, but will it continue? Apple needs another breakthrough in iPhone technology or another iPad or iPod-type invention to really get growth moving again. Just changing the size or colors of the phone isn’t enough. We need real innovation to get people to continue to upgrade.

Nearly half of the smartphones sold in the United States are iPhones, and Apple may be reaching the saturation point among potential customers here and in other developed countries. Rival smartphone makers using Google’s Android operating system continue to challenge the company with powerful, and less expensive, devices.

Over all, Apple sold 16 percent fewer iPhones in the quarter compared with the same quarter last year. That is an example of slowing revenue growth. As you know, my #1 reason to buy stocks is rising earnings at a rising rate, meaning earnings have to be increasing year-over-year at an increasing clip. (If you haven’t listened to my podcast about what makes stocks go up, please listen to episode #47 after this one. If you’re listening on your phone, just click the black bar to “Feed” and it will show all the episodes, then click on #47).

Also according to the Times, “Apple’s forecast for the current quarter did not make Wall Street more confident. The company projected revenue of $41 billion to $43 billion. That is much worse than Wall Street had been predicting.”

Amit Daryanani, an analyst with RBC Capital Markets, said that “Apple may be entering a period of slowing replacement sales, similar to what happened in the personal computer market a decade ago.”

Mr. Daryanani also noted that many companies had been hurt by the strong dollar, which makes American products more expensive overseas. “It’s a common theme across technology companies,” he said.

Lower revenue projections are not a good sign and typically not indicative of a stock I want to own. The strong dollar is a problem and we’ve been tracking the effect the strong dollar has on corporate profits in the Be Wealthy & Smart VIP Experience. Most people think a strong dollar is good, and that’s true when you’re an individual traveling abroad. But when you’re a company exporting products, it’s a bad thing because your goods are more expensive and that makes your product less competitive and slows your sales.

The Times article goes on to say Apple’s CEO “portrayed the slowdown as part of the normal two-year product cycle of Apple’s iPhone. The company’s larger iPhone 6 line, introduced in 2014, led to a surge in sales last year as customers upgraded, sending Apple’s stock to a record high.”

“Apple’s newest phone, the four-inch iPhone SE, went on sale March 31 — too late to affect the second quarter’s results — and Mr. Cook said that there was more demand for it than Apple could currently fill.”

So Apple has a strong product with the iPhone 6 and sales and upgrades are brisk. I upgraded to my 6 last year and love it. But is that enough to continue to grow the company or will revenues continue to decline?

Toni Sacconaghi, an analyst at the Bernstein brokerage firm, said “There’s no question that Apple’s best days are behind it. The company grew at astronomical rates, and it’s now so big that its ability to grow at those rates doesn’t exist anymore.”

But CEO Tim Cook sees things differently. He described the decline as a “pause,” not a fundamental change in the company’s business. “This, too, shall pass,” he said in a call with Wall Street analysts to discuss the results. “The future of Apple is very bright.”

But here’s the reality: Net income fell 22 percent to $10.5 billion, or $1.90 a share.

Twenty-two percent is a big number. You can’t grow a stock when net income is crashing by almost a quarter!

Here’s where investors get hung up: they fall in love with the past performance of the company or the company’s products and then fall in love with the stock. If you do that, you’re overlooking the harsh realities we’ve been talking about like falling revenues and net income. You have to separate the stock from the company you love…you can’t fall in love with the stock just because you love the company.

It’s all about earnings, sales, net income. The metrics drive the price of the stock.

When determining a stock to buy, it’s all about increasing earnings annually. When that fails to continue, it’s a sell signal. If by some chance, it can resume it’s increasing earnings again, say with a new product that gets it back on track, then I would buy the stock again. But short of that, it’s not on my list to hold.

It’s a few days after the earnings report now and the stock is down an additional $4 to $93.74 and $36 off it’s high of $130 a share. It may continue to drop as professional managers choose to sell it and reallocate to a more promising technology stock.

Having a discipline as to why you buy and sell a stock will serve you well. Don’t be guessing about when to sell. When a stock is up 20%, sometimes investors jump out because they made a nice profit. Meanwhile, the stock continues to climb and goes on to become the next Apple and they’ve left a million dollars on the table!

Don’t sell because you made a profit. Let your winners run and sell your losers. Also, have a reason that you sell, other than because you made a profit. Is there a fundamental change in a stock? Are the earnings not increasing at an increasing rate anymore? Is their product pipeline unimpressive? What innovation are they bringing to the market that could generate more sales?

For your sell discipline specifically, declining earnings, revenues and sales are going to indicate ahead of time what direction the stock’s going to go. Use these metrics as your guide. These are the things you want to look at to determine when to sell a stock.

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Related posts:

1. 282: SNAP Back to IPO Price, Buy Now? – Listener Question
2. 147: Checking Performance Data to Identify Winning Stocks
3. 194: Should I Short Deutsche Bank? (Listener Question)

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