The Wall Street Journal recently had a couple of articles on Apple that I found interesting and thought I'd share with you. These articles basically show the tremendous outsized impact that Apple shares have had on the S&P 500's performance over the past few days as Apple's stock has risen higher and higher.
But, before I go on, let me give you some background on Apple, for those of you who don't follow stocks actively, or Apple specifically. Apple shares traded mostly flat from 1985 to 1999. In late 1999 and early 2000, Apple shares started rising, from about $26 in January 2000 to $200 in January 2008, gaining about 30% annually. Then shares dropped to $90 during the mortgage banking crisis, but rebounded stronger than ever; to the $515 level they're at now. That's an 80% gain every year over the past three years. And on January 25 (2012) Apple became the largest company by market capitalization as it pulled ahead of Exxon Mobil. And since then, Apple shares have surged even higher, giving Apple a market cap of about $480 billion: making it more valuable than Microsoft and Google combined, that's pretty darn amazing!
Okay, so now that you know Apple sports the largest market cap, let's get back to the Wall Street Journal articles I read. The Journal interviewed Howard Silverblatt, a Senior Index Analyst at Standard & Poors and a rapid-fire Brooklyn resident who is perhaps best known as a sort of high priest, historian and keeper of the S&P 500 stock index. Howard's the guy who meticulously tracks and manages data on the index and has a wealth of information on his fingertips. When asked about Apple, Howard's take was that Apple's stock surge over the past few years has had a rather meaningful impact on the performance of the S&P 500 index as a whole, and more specifically on the technology sector within the S&P 500. According to Howard's data:
Apple's market cap accounts for 3.8% of the total market cap of all S&P 500 companies. That's pretty amazing in itself, because if all the stocks in the S&P 500 were equally treated, Apple would only account for 0.2%: but Apple's pulled far ahead to garner a 3.8% share
So while the S&P 500's technology sector gained 9.8% from its October 2007 high, it would have been down 4.1% had Apple not been in the Index: so Apple has disproportionately skewed the Index, which can be misleading if investors take the Index's performance at face value and assume it accurately depicts the average performance of all companies in the Index.
And while the entire S&P 500 index is down 13% from October 2007, it would have been down an additional 2% without Apple.
And, year to date over the past two months of 2012, while the S&P 500 has gained 8.2%, gains would only have been 7.7% without Apple.
Interestingly, according to Howard, Apple is still not the record breaker: that distinction is still held by IBM, which accounted for 6.3% of the S&P 500 index from 1981 to 1983. In the early 1980s, AT&T accounted for over 5%. IBM and AT&T are still in the Top 10 at #4 and #7 respectively, and IBM still holds 1.85% of the Index. And just fyi, the top 10 now are, in order, Apple, Exxon Mobil, Microsoft, IBM, Chevron, GE, AT&T, Johnson & Johnson, Procter & Gamble and Wells Fargo.
On the tech-heavy Nasdaq, Apple has an even higher 16.6% weighting - more than Google, Intel and Amazon combined. Now, the Nasdaq is heavily followed by tech investors so it's important to strip out Apple and see how the rest are doing.
So when comparing corporate earnings and stock market trends, apples to apples, it may just make more sense to toss out Apple! Because it's gargantuan size clouds the overall picture of earnings and the profit margins for other American corporations. So many stock analysts at major firms like Goldman Sachs, Barclays, Wells Fargo and UBS, are now looking at overall market trends sans Apple to get a clearer picture of how the rest of the economy is doing. And more so within the tech sector - as David Kostin of Goldman Sachs points out, the tech sector will likely show an earnings increase of 21% for the fourth quarter of 2011 with Apple, but only 5% without it: 21% with Apple versus 5% without it - that's pretty stark! So Apple, as you can see, has significantly distorted the overall economic outlook, for the better. Apple is way ahead of other companies in terms of revenue and income performance; but many other companies are struggling to meet analyst expectations but that is not easily apparent in the aggregate because of Apple's outsized positive influence.
And, cuing to my Dividend piece in an earlier show, Apple has a cash hoard of about $100 billion, and while it does not currently pay dividends, it's becoming an investment fad because many are rushing to buy Apple thinking, and hoping, that it will start paying out dividends sometime soon. And you know how investment fads tend to work out! Think tech in the 90's and real estate in 2005.
Apple's done amazingly well and many expect that it will continue to do so, perhaps it is now a crowded trade, perhaps it's too much in the limelight, no one can really say. If you already own Apple shares, I am really happy for you, and want to suggest that you also calculate your overall stock market gains without Apple to get a more realistic picture of how your portfolio has performed.
So how does all this matter to you? It matters because I want you to know that you cannot always take the Index as a whole at face value and assume it represents the average performance of all 500 companies in it. You should always watch for special circumstances that may have overly influenced performance, positively or negatively, and review performance without these outliers to get a clearer picture. Moreover, though we're talking Indexes today, always look for the outlier effect in all your analyses. For example, with mutual fund performance; a manager's great performance may be attributed to just a few well-timed and lucky picks.
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Steven L. Pomeranz, CFP is a 29 year investment management veteran and host of "On The Money!" which airs on NPR station, WXEL in South Florida. He concentrates on serving high net-worth individuals and has been named one of the Top 100 Wealth Advisors 2007, by Worth magazine (October 2007 Issue), honoring America's premier financial and wealth strategists.
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