Apple vs. Google – A lesson in buy-and-hold

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The story of Apple stock over the past two years is a great lesson in why you pick your companies and stick with them.  Despite the fact that Apple had tremendous earnings and generates more cash than any other company, the stock price hit a large decline starting at the end of 2012 through the middle of 2013.  The reasons cited in the press were many – that they lost their mojo, Samsung and Google Android was going to replace the iPhone, that Tim Cook didn’t know how to innovate.  Despite all this, each quarter they continued to grow their top line revenue and maintain phenomenal profit margins.

Today, Samsung is reeling from razor-thin profit margins in the low-end phone market, and Android struggles with platform issues (each phone manufacturer has their own version and few users stay current with the latest software releases).  Now with a roster of new phones and mobile devices on an improved iOS, Apple continues to dominate the high-end, high-profit market.

And the stock price reflects it.  To compare Apple to Google (who had a tremendous 2013), the lesson is clear.  For 2014, Apple has posted a 33% gain versus a loss for Google.  For the past two years, Apple also beat Google, 64% versus 58%.  And over the past three years, it is Apple 110% to Google’s 73%.  Go back further and the difference widens dramatically.  Invest in Samsung during this period, and you would have lost money.

Not that investing in Google was a bad idea.  But the last thing you want to do is chase returns…. dumping Apple in the rout of 2012/2013 and switching to Google – versus just holding on – would have generated lower returns.  Timed wrong, and you could have lost money.  Add to an existing Apple position based on the fundamentals during the volatility, however, would kick up your returns dramatically.

Chasing stock returns – and buying into the hype – can be a dangerous strategy.  Instead, fundamental investing is picking your stocks based on the value the company generates – and avoiding the temptation to follow the herd.

David Matias

2014 IRA Update – Required minimum distributions (RMDs)

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Starting at age 70 1/2, Traditional IRA account holders are required by law to withdraw a portion of assets each year as a distribution. It’s important to note that in most cases RMDs only apply to traditional IRAs, not their Roth IRA counterparts.

These required minimum distributions (RMDs) must start by April 1st of the year after you turn 70 1/2. After that, all RMDs must be made by December 31st of that year.

For example, if you turned 70 1/2 in 2014, you have until April 1st, 2015 to take your first distribution and December 31st, 2015 to take your next one. There are significant penalties for not taking your RMD during the correct time-frame, including potentially having the non-distributed portion taxed at 50%.

The RMD amount is determined based on the account holder’s age, the IRA’s previous year balance, and a withdrawal factor, set by the IRS, that is primarily based on life expectancy. TD Ameritrade has a calculator that can help you predict your next RMD.

If you have multiple IRAs held at different institutions, you’ll want to make sure there is a coordinated effort to determine the total RMD amount for all of your accounts.

If you’re a Vodia Capital client, we will be contacting you over the next few weeks to help make sure your distribution is completed accurately and on time.

 

Please do not hesitate  to contact us if you have any questions.

 

Marcus Green

Good Economic News

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There has been a spate of good economic news over the past week: GDP in the third quarter of 2014 was 3.5%, and jobs growth continues to be steady at over 265,000 per month for the entire year. The GDP number is particularly encouraging, given the 4.6% growth in the second quarter. Keep in mind that we need at least 2% to buffer the economy from outside shocks, and it has been a long while since we sustained anything close to 4% on average.

The jobs number, while encouraging, doesn’t address the participation rate which is now down to 62.7%, the lowest since 1978. That is bad news for a sustained economic recovery as fewer people are participating and wealth continues to be concentrated. For a consumption-based economy to maintain robust growth, all need to experience an increase in wealth to increase spending.

But the flip side to the labor participation figure – from a markets perspective – is that the Fed is likely to continue a very accommodative monetary policy. If there is a real increase in jobs and participation combined, the US economy could be on a good footing for many years ahead.

David B. Matias

Interesting Week

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Interesting week:

US employment figures look great, GDP on track, US oil production surpasses Saudi Arabia, Russia and China.  All good data points.

Old news:  Europe isn’t growing, China is struggling, commodities continue a glut.

So what is the new news that causes the market to drop 10%?  From what I can tell, more about perception and changing fears than anything that has happened.

The only exception is Ebola – here in our own country in one of our own towns.  People realize just how vulnerable we are.  Fear is the bane of the markets.

In the end – a good purge.  We needed it…  and it should calm down in time with US growth generation again taking the headline news.

David

Market Minute – April 24, 2013

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Apple Earnings Release

It is impressive how the market can fixate on a single stock.  Apple has been that focus for a few years now – on the way up and on the way down.  And while I rarely focus on a single company given the diverse nature of our investment strategy, Apple is as much a mainstream news event as American Idol.

Last night Apple released their earnings from the past quarter (their Q2), and gave some guidance for the next quarter.  While there has been a tremendous focus on Apple’s “lost mojo,” they actually did extraordinarily well – selling 37.4 million iPhones in the quarter – a small gain over the same quarter last year.

That fact is huge.  Despite the bad press, the cratering stock price, and the onslaught of competition from Samsung, HTC and others, people still want Apple products in record numbers.  The distorted market perception ignores the global diversification that Apple accomplished last year.  Now two-thirds of their revenue comes from abroad, attributable to the fact that they expanded into over 100 new phone markets in 2012.  To emphasize the appeal of their products, iPad sales increased by 65% over the same period.  Not a small feat – and one done extremely well.

To give you a little context, iPhone and iPad sales combined to roughly 57 million units for the three-month quarter.  That translates to roughly 26,000 sold every hour of every day, or 440 units per minute.  Given an average selling price of $612 for the iPhone and $449 for the iPad, that is stunning demand for a premium product.

The downside is that Apple will not have any new phones, pads or game-changing products for at least another four months – an eternity in the minds of stock traders.  But in my opinion, that is fine.  What Apple has done thus far in logistics and supply-chain in unprecedented.  To wait and build that supply-chain for the next wave of products over the following year is perfectly acceptable for a long-term view of maintaining the world’s most valuable brand.

Consistent with this philosophy, and solidifying the slow-growth nature of such a large market footprint, Apple is radically changing their balance sheet structure to be more friendly to value-based investors.  It is well overdue – this should have been done last year and created a wicked backlash from investors – but the changes are good ones. First, they boosted the dividend to a 3% yield.  Second, they increased their stock buyback by $50 billion, reducing the stock float by 15%.  And third, they will bring debt onto the balance sheet for the first time in decades.  All of these changes have the net result of increasing the value per share, flowing cash to stockholders, and lowering the stock volatility in the long term.  In short, they will now be a value stock.

Unfortunately, Tim Cook and Apple’s culture took many missteps before getting to this point, and the stock has suffered mightily.  Some of those missteps were addressed last night.  Next is execution on the business strategy and the ability to create new and exciting products – and that again is where time will tell.

Regards,

David B. Matias, CPA

Managing Principal

Market Minute – April 22, 2013

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Last week was another one of those moments in the market which reminds us that we are in troubled times.  Taking a completely agnostic, statistical perspective on last Monday’s events in the gold market, we again had an event that demonstrates the unstable foundation of the market.  In this case, gold dropped by 5.8% on Friday, April 12 and then 7.7% on the following Monday, for a combined two-day drop of 13.5%.

For perspective, using the prior 1,000 days of trading data as a baseline, gold typically moves around 0.5% per day.  A 2% move is big (once every couple of weeks).  3% is rare (three times a year).  A bigger move than 3% is statistically remote.  A two-day move of 13.5%, under these conditions, has a probability of one-in-a-trillion or roughly once every four billion years.  So maybe my assumptions are wrong (that market returns are normally distributed), but then you would have to discredit an entire generation of financial theory and models.

So where does this leave us?  In the span of two days, gold prices (and a host of other commodities) moved in a way that is not supposed to happen unless we are facing the most dire of global circumstances.  In effect, something snapped in commodities.  There are a host of explanations as to why (Cyprus might sell all their gold, Goldman Sachs starting bad rumors, North Korea did it, Paulson did it…. and so on), but the result is rather simple.  We are in an investing world in which market mechanics are evolving into a dynamic that is both unpredictable and challenging to comprehend.

[To emphasize the volatility problem, yesterday someone hacked the AP twitter account and sent out a false report of an attack on the White House.  The Dow dropped 140 points in a few seconds, then recovered.  Someone made a small fortune on their put options.]

My suspicion regarding gold is that the Exchange Traded Funds (ETFs) which hold a large percentage of the World’s gold supply are causing distortions in the market and led to the market dislocation.  It is a rather nuanced explanation based on the way that ETFs are created, but the theory also helps to explain the Flash Crash of 2011.  Whatever the answer is, since 2008 we have been in a new world of investing and markets.  Gold is supposed to be a safe haven, stable asset with limited volatility.  While it still may be safe in the long term, it is now subject to the same randomness as the rest of the market.

I will later elaborate about other such events during the past three weeks, but the conclusions are the same.  Under the veneer of a bull market in US stocks, there remains tremendous unpredictability and dislocations continue to manifest.

As an investment manager, we have mitigated these risks through our asset allocation strategy and the manner in which we use specific securities.  And in all likelihood, the dislocation in gold is temporary.  But time will tell, as always.

Regards,

David B. Matias, CPA

Managing Principal

Boston Marathon, 2013

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I would like to take a moment to acknowledge yesterday’s events, both on a local level and with a broader perspective.

First of all, to the best of our knowledge everyone within the Vodia community is safe and sound.   We thank all of you who reached out to us in the past day – while it is a tremendous shock to all of us here it is deeply reassuring to be touched by so many.

So often it comes down to timing.  In our professional world timing can be everything.  In this situation, timing was again all the difference.  As a local who grew up here, I have stood on that spot a hundred times.  Yesterday, I was not at that spot.  Others were, and their lives are changed forever.

I can explain time in a rational sense using all sorts of paradigms and equations, but I have none to explain yesterday.  Instead, it is a reminder that we also have to honor the spiritual aspects of life and what a moment can be.

There is no good explanation for what happened yesterday.  This is our world today, a reality we all live with.  But we also have the choice to embrace the aspects of humanity that push us all to a better place.  That place is inside each of us, and ultimately forms how we each deal with yesterday.

Here at Vodia we send our wishes and thoughts to the victims of yesterday’s tragedy.

Regards,

David