As Americans celebrated all that makes their country great yesterday, I wonder how many included Apple (US:AAPL) on their list? After all, the $3 trillion-plus market capitalization was a nice Fourth of July gift for the country and its investors.
True, AAPL stock has been at these lofty levels before, but closing and holding above $3 trillion? It’s a big deal.
“The Apple bears and skeptics continue to scratch their heads as many have called for Apple’s ‘broken growth story’ this year in a tougher backdrop to which we firmly believe the exact opposite has happened with Cupertino heading into a massive renaissance of growth over the next 12 to 18 months,” Wedbush Securities senior equity research analyst Dan Ives wrote in a June 30 note to clients, according to CNBC.
AAPL stock is up nearly 54% year-to-date.
As a Canadian, I will admit some envy. By comparison, the S&P/TSX 60 Index, Canada’s most important equity index, is up less than 4% on the year.
The combined market cap of all 60 constituents in the index is $2.54 trillion, or 57% less than Apple’s. So, if you had $10,000 to invest in one of them, which would be the better buy?
The obvious answer would be to go with the index, similar to betting on the field in a horse race. However, the actual answer isn’t nearly as simple. Here’s why.
Apple Could Be on the Cusp of Renewed Growth
For the last couple of years, Wall Street, and investors in general, have contemplated Apple’s slowdown in revenue growth. After all, the iPhone is now 16 years old. There’s not much more Apple can do to make its phone materially better than anything that’s come before it. Further, its competitors continue to innovate, so the choice isn’t nearly as easy as it once was.
While the iPhone remains a great product, Apple’s become more about an entire ecosystem than a specific product or service, making it so valuable.
“In our opinion the Street has severely underestimated the massive installed base upgrade opportunity around iPhone 14 and now a mini super cycle iPhone 15 ahead with roughly 25% of Apple’s golden customer base not upgrading their iPhones in over 4 years,” Ives wrote about Apple’s big advantage.
That golden customer base convinced Warren Buffett to invest nearly 47% of Berkshire Hathaway’s (US:BRK.B) $377 billion equity portfolio in AAPL stock. The holding company owns 915.6 million shares of Apple stock or 5.8% of the company. Berkshire is the third-largest shareholder in Apple, behind only Vanguard and BlackRock (US:BLK).
In early May, at Berkshire’s annual shareholder meeting in Omaha, Buffett laid out why his company has such a prominent position in the iPhone maker. According to the so-called “Oracle”, the most important thing is that Apple is a better business than any of its own.
“It just happens to be a better business than any we own,” Buffett said. “Our railroad is a very good business. It’s not remotely as good as Apple’s business.”
Buffett also pointed out that due to Apple share repurchases, Berkshire’s ownership has increased by 40 basis points since the end of 2018. That’s without Berkshire having to spend a nickel.
Share repurchases are often made when there isn’t a better investment for a company’s excess cash. Buffett would agree that Apple buying Apple stock is an excellent allocation of its capital.
Apple introduced the Apple Vision Pro in early June. The virtual reality headset could be the next big product since the launch of its AirPods in December 2016. Due to supply chain issues, it expects to sell 400,000 units in 2024, down from the original goal of one million.
However many it sells, Apple’s growth might be higher than analyst expectations over the next 24 to 36 months.
The Diversification of XIU
Buying AAPL stock gets you a tiny piece of one of the world’s greatest companies. There’s no disputing this. However, the company risk attached to owning AAPL and nothing else makes the iShares S&P/TSX 60 Index ETF (CA:XIU) — the exchange-traded fund tracking the gauge’s performance — a far less risky investment to make, all things being equal.
After all, in the top 10 holdings, you get four of Canada’s six largest banks, two railways, two energy producers, and two other large Canadian companies. The diversification comes in handy during downturns in the economy and markets.
An argument can be made that there should be an S&P/TSX 10 Index, which would hold an equal-weighted amount of the 60’s top 10 holdings. Those currently account for 38% of the index’s total market cap. They’re up an average of 8.0% in 2023, more than double the XIU.
And, while the XIU’s diversification is nice, a bet on Canadian equities can sometimes act as an anchor on performance. Now is one of those times. With bank and energy stocks stuck in neutral, the XIU is likely dead money for the remainder of 2023.
A better solution would be to take some of XIU weighting and allocate it to a growth ETF with a large AAPL holding, such as the Invesco NASDAQ 100 Index ETF – CAD Hedged (CA:QQC.F). It is a hedged version of the QQC, which invests 100% of its net assets in the U.S.-listed Invesco NASDAQ 100 ETF (US:QQQM). Apple is the second-largest of the 100 holdings, with a 12.45% weight.
This article originally appeared on Fintel
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