So it is with most technology ETFs that have 20-25% in Apple (AAPL) including the ETFs we use for "large" separate account and RRGR which is the ETF we manage. The way the numbers work out our position in Apple, by virtue of its weighting in IYW and IXN was around 4% of the portfolio. I seem to remember Apple's weight being 10-12% of tech ETFs a few years ago but of course the stock has done much better than most of the sector and has grown to now being 20-25%.
In the last month the stock is up 15% which is far ahead of the sector. The recent lift is probably due at least in part to excitement about the next version of the iPhone, apparently iPhone 5, the iPad Mini and the prospects of what iTV might end up being. The recently initiated dividend hasn't hurt either.
In the last few years the products and the stock have both become ubiquitous. The stock has been the largest by market cap for a while now and it seems like there has been a contest among sell side analysts to come up with ever higher price targets.
I have no great bear case for Apple specifically but there are some markers in this instance that have meant trouble in the past for other stocks. Other than Exxon Mobil (XOM) it has been difficult for companies to maintain the top market cap spot. Many people believe the stock is different. The business with analysts and price targets is reminiscent of the dot com era. A little more anecdotal, it seems like any interview with a portfolio manager includes "so how much Apple do you own." As mentioned in a recent post, if you watch stock market television for a few hours you will be made acutely aware that there at least a serious infatuation with the stock although you probably know this already.
Again, this is not a fundamental bear case just a few words of caution about a stock that has grown dramatically to become about 4% of the portfolio picking up some warning signs along the way.
Our trade was to sell half of clients' core tech ETF position and roll that dollar for dollar into the new First Trust Nasdaq Technology Dividend ETF (TDIV). TDIV has no Apple for now and based on my understanding of the methodology will not have Apple for at least a year and when it finally is added it will target about a 7% weighting.
The net effect was to cut our Apple exposure in half after a breakout that I think is discounting in near term future news such that I think the product announcements are mostly in the price now.
TDIV is a dividend oriented fund. I called into First Trust and was told the yield for the index is "a little over 3%" which would put the yield for the fund in the mid-high twos but I have seen other commentary that says the yield is quite a bit higher than what I was told. TDIV, similar to XLK from SPDR has a small allocation to telecom so to be precise we have reduced our tech exposure a little but if the market rips higher then the tech portion will grow faster and the fund should pick up some tech beta until the next rebalance. If the market pukes down then the tech portion will will go down faster and the fund will become more defensive until the next rebalance.
As far as the yield I will assume mid-high twos which is better than we've been getting in our other funds. This shift also makes some sense if we are later in the stock market cycle and given that the SPX bottomed 41 months ago, that seems plausible.
If Apple skyrockets from here, we still own the stock albeit in a smaller weighting, a little under 2% now. If the stock goes to $1,111, as one analyst is calling for, then our position would grow to a little over 3%.
The picture is of the Grand Tetons through a window at the Cunningham Cabin.
9 comments:
This reminds me of a question I'd been meaning to ask, since you often use individual stocks as a sector proxy.
If you are not comfortable getting specifics, that's cool.
Suppose that you have a history in farming, and you recognize that food supply will be a bigger and bigger issue in the future. Suppose you believe Jeremy Grantham is right that this will be a massive issue, but you can't really execute his idea of buying land.
Are there "types" of investments that could act as a proxy for agriculture beyond grain futures ETFs or agriculture equipment manufacturers?
Stephen,
Although I'm not Roger, I thought I would chime in.
I would say be careful of recency bias; that the past few years of good returns in the agricultural economy will continue into the future. For example, what about people who wrote off Apple stock as a "has been" under Amelio's leadership? Look at Apple now. I think you could extend a similar analysis to the farm sector now. Instead of extending the recent poor performance of a stock into the future, you may be attempting to extend good performance of the agricultural sector into the future.
I don't think it can be emphasized enough how dependent U.S. Agricuture is on government policy whether it is commodity price support programs, subsidized crop insurance, ethanol mandates etc. Those programs can vanish quickly at the whim of politicians and would in turn cause a huge disruption/adjustment to the agricultural economy. Would that be positive or negative for an investor at these prices? Who knows? But, I would venture to say there is not much margin of safety now. That's not to say things can't continue to improve, but I would say that betting on it is more speculative than a solid investment.
IMO, the investment area with a more attractive margin of safety with the potential for satisfactory investment returns is Europe.
That doesn't answer your question. But let me ask you this. What if you can find your proxy, and you do invest in it, and your analysis (or Grantham's) is wrong? What then?
SD, I will attempt to address this with tomorrow's post. Thank you.
Anon 3:16 here again
Another bias to be aware of is confirmation bias. It manifests itself in one form when one only seeks information which confirms one's preconceived notion of how things are or should be.
To provide a credible alternative viewpoint, I recently read an interesting article in Corn and Soybean Digest written by Richard Brock titled, "Drought = Ag Bubble/" which can be found here:
http://tinyurl.com/8wm935a
Also, it won't be long before politicians catch wind that farmers are actually netting more per acre in this so called drought disaster if they have federal crop insurance than if they had a normal crop. There are already farm state politicians who believe government programs should be curbed because farming (major commodity crops) has become almost riskless. Obviously, livestock, certain produce etc. have not.
I think there is little doubt that land values will drop when per acre revenues/profits drop. This will affect everyone in the agricultural supply chain too.
Crop insurance does not net you the same as crop yield. You must provide multiple years worth of "proof of yield" to obtain crop insurance; once you've proven a particular field (and you have to to provide years of paperwork for each field) your price is determined by the yield you want to insure. I don't think I've ever heard of a farmer insuring for 100% yield since it'd be prohibitively expensive, but I guess it could happen if you were willing to pay for it.
I'm aware that 40% of the (yellow) corn crop goes to ethanol production (I think that will have to end in the next decade or 2). But I'm also aware that 50% of the soybean crop - and growing - is shipped to China. Some large percentage of pork production goes to China. We made big gains via more land (80s), double cropping etc. (90s) and genetically modified seed - but OTOH population growth is speeding up. India and China have ridiculously inefficient farms, and China is losing arable land every year.
I'm aware of recency bias (my brother retired the year before the first big surge in corn prices) but I'm not looking at potential food supply issues as a short term problem.
As for "what then?" well, I'm not sure how to answer a trivial question except with a trivial answer: the investment loses money. I'd find it relatively hard to believe any argument that says "the world would need the same or less food in 20 years or 30 years" but that, of course, is no guarantee of success. But I don't believe 3 to 4 (maybe 5, probably not) percentage points of my total portfolio under-performing the market is going to keep me from retiring when I decide to retire.
"Also, it won't be long before politicians catch wind that farmers are actually netting more per acre in this so called drought disaster if they have federal crop insurance than if they had a normal crop."
"There are already farm state politicians who believe government programs should be curbed because farming (major commodity crops) has become almost riskless. "
I'd love to see proof of either one of these.
For one, Senator Grassley proposed income test limits in order to qualify for crop insurannce during the latest round of farm bill negotiation. That's about as farm state as it gets.
With regard to profitability by collecting crop insurance indemnity, there is an article that says just that at the corn and soybean website I cited. I kind of know what I'm talking about since I adjust crop insurance policies.
Thanks for engaging me on the subject. You certainly seem to be well informed.
I did read about and watch an interesting video on positive health effects of fasting. One of the facts that was presented was that life expectancy actually increased during the great depression when food became scarce. Perhaps someday calories per person consumption will decrease if there is something to this.
the 2nd question wasn't about "farm state." it was about "riskless." I'm guessing that you cannot buy crop insurance if you don't plant a crop. So there's your risk. Further, if you don't plant a crop for say, a year, the documented yield on that field drops dramatically.
As for the first question, maybe you're talking about this article: http://cornandsoybeandigest.com/marketing/real-crop-insurance-value
Again - I'm guessing you don't sell crop insurance to farmers who don't plant a crop.
Been out of town.
Yes, you can collect crop insurance if you don't plant a crop. It's called prevented planting. Insurance companies pay out millions each year for causes such as: too wet, too dry, failure of irrigation supplies. The yield does not drop. There is what's known as a "yield plug" in the database for year's that you cannot plant. This is one reason land values are inflated.
Most farmers buy "revenue protection" which protects them against a drop in yield or price. Since the harvest price that will be used to calculate an indemnity will more than double from the base price, this results in farmers who don't have a crop reaping a huge profit on a per acre basis. And guess who is the najor re-insurer for the crop insruance companies...that's right...you are. The U.S. Taxpayer.
I work claims all the time where the farmer is paid when there is o crop.
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