As the stock market moves higher, more and more analysts are predicting a correction if not a stock market crash. If you have made money in this bull market is it time to make some adjustments just in case? Last year we wrote about how to prepare for the next stock market crash. Tech has been the leader in driving the market. Consumer stocks are the traditional refuge when the market tanks. If tech has been the leader then we might expect tech stocks to take the biggest hit with a correction or a crash. One of the tech leaders is Apple, AAPL. Its share price has gone up nearly fifty percent in the last twelve months. One might expect AAPL to take a big hit during a market correction. But, unlike other tech leaders, Apple does not have a stratospheric P/E ratio. In fact, Apple’s P/E ratio of 18 is amazingly tame in comparison to Netflix at 193 or Amazon.com at 511! Another reason to trust that Apple will not correct significantly if the market falls is the company’s cash hoard offshore of more than $200 billion. But, the biggest reason that Apple will not tank in a market correction is that Apple is not just a tech stock but a consumer stock as well.
People Cannot Live Without Apple Products
Warren Buffet generally avoids tech stocks because he says he cannot predict how much they will worth 5 and 10 years in the future. Unlike a tech product, a Snicker’s bar or bottle of Coca Cola, is predictable. So, why does the Oracle of Omaha own so much Apple stock? He says the stock is more of a consumer stock than a tech stock. Apple has amazingly strong brand name and extremely strong customer loyalty. This is because the company has focused on the customer and ease of use of its products. And it has built a range of interlocking products and services such as ITunes and various useful apps. Many people cannot live without their iPhone and other Apple devices and services. This brand loyalty to a wide range of products and services is what will help Apple retain earnings even if the wider market crashes. And those earnings, as well as repatriated offshore cash, are why Apple will not be hurt in a stock market crash.
Will Apple Be the First Trillion Dollar Company?
At its current rate of growth Apple will pass the trillion dollar mark in market cap in 2018. In fact, if more people buy Apple due to its consumer stock aspects, it could still pass a trillion dollars even if the market crashes.
What Could Go Wrong?
There is speculation that Apple could buy Netflix according to Investor’s Business Daily.
Analysts at Citi said there is a 40% likelihood that Apple (AAPL) will buy Netflix. Apple is expected to repatriate $220 billion in cash under the new tax laws. The Citi analysts said Apple has more than enough cash to buy Netflix.
On one hand this would make sense as an addition to Apple’s range of services. On the other hand it could raise Apple’s P/E ratio (Netflix=193 vs Apple=18). We asked if the new tax code would help with your investments. Here is an example of how Apple’s offshore cash could fund an outright purchase of Netflix with no other cost to AAPL.