Giant keeps climbing, but some investors wary of fall

By Sofia Costa

Bloomberg·

13 Feb, 2005 04:00 PM4 mins to read

Unveiling of Apple Pay during a product announcement at Flint Center, California. Photo / Bloomberg

Apple has reached US$700 billion ($942 billion) in market value. As investors buy up the stock, some are also hedging their bets.

Options trading shows the cost of protection more than tripled since a low in November, according to data compiled by Bloomberg. The shares are not safe from market drawdowns and a stronger dollar may hurt earnings, said Virginie Robert of Constance Associes. After climbing to a record in 2012, Apple fell 44 per cent in seven months.

"The Apple rally will stop at some point," said Robert, co-founder of the Paris asset-management firm that holds Apple shares. "Not all quarters will be as good as the last one."

Apple reported a record US$18 billion in quarterly profit last month, propelling the shares higher.

Still, the company made 65 per cent of its sales outside the US in the last quarter, and that could be a problem with the dollar at its strongest in more than 10 years.

A technical analysis signal shows momentum in Apple shares is increasing, with the relative strength index higher than 70.

The last time it reached that level in November, the stock fell 10 per cent in less than three weeks.

New iPhones and a 70 per cent jump in sales in China helped fuel Apple's success last quarter. The Californian company is preparing to begin selling the Apple Watch in April, adding to its range of smartphones, tablets, music players and computers.

Even as Apple hedges against currency swings, fluctuations could pose a threat to its earnings. Revenue in the second quarter would increase by as much as 20 per cent, less than the 30 per cent jump for the last three months of last year, said the company's chief financial officer, Luca Maestri.

Options betting on a 10 per cent decline in Apple shares cost 2 points more than those wagering on a 10 per cent rise, according to six-month data compiled by Bloomberg.

The relationship known as skew increased to 2.5 points in January - the highest since October 2012.

Apple has rallied 13 per cent this year, while technology companies in the Standard & Poor's 500 Index are up 0.3 per cent. Even so, Apple trades at 14.7 times estimated profits, 10 per cent lower than its peers in the stocks gauge.

As the company grows bigger, it will start attracting investors more interested in stable returns from dividends and such, says Alison Porter at Henderson Global Investors in Edinburgh.

Chief executive Tim Cook said this week Apple was reviewing its capital-return program and would announce changes in April. The company has completed US$103 billion of its US$130 billion dividend and stock-buyback plan.

"The stock trades below the market multiple and is still attractively valued," said Porter, who helps oversee the US$3.2 billion Global Technology Fund. Its largest holding is Apple.

"Given the potential for improved capital allocation and a higher dividend, Apple shares will draw a whole set of new investors looking for income."

But even Apple isn't immune to market volatility. The stock hit a low in October as concern about a slowing global economy sparked a rout that wiped more than US$5.5 trillion from the value of global equities.

After recovering, it fell from its November peak in mid-December as investors fled risky assets amid political wrangling in Greece.

At this price, some stock investors might just prefer to sell and get the profits, said Manish Singh, head of investments at London business Crossbridge Capital, which oversees more than US$2 billion and owns Apple shares.

"For me, the stock has more to run. This doesn't mean it won't fall if macro factors change and broader market volatility increases."