|Back to main|
Could Apple Turnaround Boost Technology ETFs?
By: Investor's Business Daily
The massive chop inApple ( AAPL ) shares is the core reason behind the technology sector's rotten performance this year. But throngs of analysts recommend buying it because of low valuations, a record share buyback and expectations for new product rollouts in the second half of the year.
A turnaround for Apple would be sweet for major tech ETFs , which have huge weightings in the stock.
The tech giant sliced off 23% year to date and 41% from its epic high of $705.Technology Select Sector SPDR ( XLK ), with a 14% weighting in Apple and the most widely traded tech ETF, lifted 3.81% year to date vs. 10.88% forSPDR S&P 500 ( SPY ).Vanguard Information Technology ETF ( VGT ) weights Apple 17%,iShares U.S. Tech ETF ( IYW ) 16% andPowerShares QQQ (QQQ) 12%. These gained 3%, 1% and 6.6% year to date, respectively.
The tech sector includes many companies -- including Apple -- that sport high free cash flow yields relative to their enterprise values, indicating they're undervalued, says Brian Frank, manager of Frank Value Fund . Enterprise value is basically how a company would be valued in a takeover. It includes the company's market capitalization, debt, minority interest and preferred shares minus all of its cash and cash equivalents.
"The tech sector is under pressure along with the rest of the economy," Frank said in an email. "The difference is valuations in tech already discount heavily for the decline. This creates opportunities in tech no matter what the economy does."
Apple plans to complete a $60 billion buyback -- the largest in history -- by the end of 2015. Birinyi Associates' studied company buyback plans of $15 billion or more since 2004 and found that a little more than half trumped the S&P 500 over the following 12 months by an average of 1%.
The tech giant also intends to pay $40 billion, or $12.20 a share, in dividends.
Goldman Sachs, UBS, Credit Suisse, Bernstein Research, Societe Generale, FBN Securities, Lazard, Deutsche Bank, Canaccord, JPMorgan, S&P Capital IQ and RBC all cut their price target on the stock but rated it outperform or buy.
Apple trades at 10.3 times 2013 estimated earnings and 6.6 times earnings minus its cash. By contrast the S&P 500 trades at 13.3 times this year's earnings and the tech sector 11 times.
Shares are undervalued given a turnaround expected in the second half of the year, Credit Suisse analysts wrote. They see the turnaround driven by a new product cycle that includes a low-end iPhone, increased carrier expansion, a return to growth and pledge to return cash to shareholders.
"We do not believe that the growth story is over, even if it is slowing," Credit Suisse wrote. "Apple, with exposure to fast growing smartphone and tablet markets, multiple channels to revenue through expansion in carriers and retail operations, and support from a strong computer advantage, remains well positioned."
In the bear camp, BMO downgraded Apple to market perform. Citigroup, Nomura and R.W. Baird rated it neutral.
"We remain concerned with increasing competitive pressures and the lack of a near-term product catalyst," Baird analysts wrote. "Further, company comments suggested that its next products might not launch until this fall, which could also create a challenging September quarter."