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Apple rewards last year’s true believers

Tom Stevenson

Tom Stevenson - Investment Director

Shares in iPhone maker Apple always grab the headlines. With 1.5bn of the company’s devices in use around the world, many of us have a personal interest in how the business is doing. Even if we don’t have one of its smartphones in our pocket, we probably invest in a global fund that owns the shares.

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The latest set of quarterly figures suggests the Cupertino-based tech giant is doing very nicely thank you. Its profits in the three months to December grew 11% to $22.2bn, safely ahead of the previous record set two years ago. Earnings per share were even better, up 19% to $4.99.

Sales of the iPhone were the big surprise in the latest figures, rising from $52bn to $56bn. Analysts had expected sales to be flat, and the phone accounted for 61% of total sales in the quarter, up from 48% six months ago.

But there is more to Apple than smartphones and tablets. The services division, which includes the App store and streaming content enjoyed a 17% hike in sales. Wearables - AirPods and watches - were 37% stronger.

What’s really interesting about Apple, however, is what’s happened to its share price over the past couple of years. It’s been a roller-coaster ride. If you had bought in at the beginning of 2018 you would probably have paid about $175 a share. By the beginning of October that year you would have been very happy, with the shares worth nearly $230, but by the end of 2018 you would have been underwater. The shares ended 2018 under $150.

Fast forward to last night’s results announcement, however, and anyone brave enough to jump aboard at the beginning of last year would have more than doubled their money. Apple’s shares rose 2% in after hours trading to $323.50, having already added 2.8% in the regular trading session before results were unveiled. Please remember past performance is not a reliable indicator of future returns.

When you consider that Apple is the biggest quoted company in the world bar Saudi Aramco, valued at $1.4trn, its performance in the past year is nothing short of remarkable.

Of course, hindsight is a wonderful thing when it comes to investments. It might seem obvious today that Apple was a steal in the wreckage of 2018’s fourth quarter slump. In real time, it felt rather different as investors fretted about whether the company was running out of ideas, failing to persuade people that it was worth upgrading their phones for a slightly better camera but otherwise pretty marginal improvements.

But roll on 12 months and everyone is looking forward to the imminent launch of 5G capability and pricing in a big new renewal cycle as we all get a taste for high speed connectivity. The truth is all of this was predictable a year ago. What’s changed is market sentiment.

Looking at the Apple roller-coaster had me searching around for similar situations in the recent past, to see if there are any lessons we can learn about buying the dips and benefiting from the market’s frequent but unpredictable rebounds.

One very different pattern has been provided by Fever-Tree, a popular stock with hobbyist investors in recent years as it seemed for a while to illustrate the wisdom of investing in what you enjoy. The maker of upmarket soft drinks soared as its tonics became the mixer of choice for discerning drinkers.

At around the same time that Apple was being pummelled by the market in the fourth quarter of 2018, however, Fever-Tree was enduring a similar experience. Between September and Christmas that year, its shares fell from around £38 to £21 as fears mounted over the company’s ability to repeat its home-grown success in overseas markets such as the US and Europe.

In the early months of 2019, Fever-Tree also recovered strongly and by May the shares were back at £32. At that point, however, the fortunes of Apple and Fever-Tree diverged. Concerns about the company’s high valuation and the likelihood that its spectacular growth rate would prove unsustainable saw the shares head south again. In the past eight months they have lost half their value and the latest results announcement confirmed that investors were right to worry.

There’s a third pattern that is best illustrated by BT, the UK’s phone, broadband and TV combine. In this case, the shares trebled between 2010 and 2016 as investors focused on the growth potential of the markets it operated in and its low starting valuation. In the past four years, however, the shares have given up all of those gains as investors decided that the glass was actually half empty, shining the spotlight instead on the cost of buying TV rights, high debts and more recently the risk of a Labour government nationalising broadband.

BT’s shares could have been bought for 150p in 2010, sold for over 500p in 2016, and are now worth just 175p again. In this case, investors will have had plenty of opportunities to buy in after a savage fall in price, convincing themselves that the market had over-reacted. The apparently cheap shares have just got cheaper still.

So, unfortunately, there is no simple template for buying out of favour shares. Sometimes they bounce back meaningfully (Apple), sometimes they fool you into thinking they are going to rally (Fever-Tree) and sometimes (BT) they just keep piling on the pain.

The only sensible way to manage this uncertainty is to hedge your bets by putting your contrarian eggs in a variety of baskets. By all means try and spot the next big recovery - it is where the big money is made by investors - but accept that you will make some expensive mistakes along the way and diversify at least some of your risk away.

If you don’t have the temperament to be a contrarian investor yourself (and it is very difficult, believe me) then the best approach is probably to seek out a value-focused fund manager who can take the mental strain on your behalf.

One such contrarian fund on the Select 50 list of our preferred funds is Fidelity Special Situations, managed by Alex Wright. He is an investor who, like his predecessors on the fund, Anthony Bolton and Sanjeev Shah, seeks out undervalued shares with a catalyst for a rebound. And with more than 70 shares in his portfolio, the chance of any one of them causing a serious problem is minimised.

Five year performance

(%) As at 28 Jan 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Apple -19.4 30.2 39.4 -8.5 100.6
Fever-Tree 213.5 82.8 107.7 4.4 -44.6
BT 11.7 -32.3 -8.5 -4.2 -19.7

Past performance is not a reliable indicator of future returns

Source: FE, as at 28.1.20, in local currency terms with income reinvested

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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