19 February 2023

Note from a Former AAPL Analyst

By Matthew McKee, CFA, CFP®

February 19, 2023

My first computer was an Apple IIe. I used it to write my elementary school “papers” and play The Oregon Trail. Such fond memories.

Apple is a company that needs little introduction. Everyone knows it – which might be why everyone owns it.

With 15.8 billion shares outstanding priced around $150 per share, the market values Apple at $2.4 trillion – more than any other company in the world.

But it is not the market.

Apple represents about 5.5% of the US stock market (if you include companies of all sizes), and 6.6% of the S&P 500, which tracks the 500 largest companies. Globally, Apple makes up 4% of the stock market.

Since founding Target Rock, I’ve spoken with many people whose investment portfolios have 20%, 30%, or in one case, 50% dedicated to AAPL.

My first job after business school was as an analyst covering telecom hardware stocks. My responsibility was to know 20 specific companies inside and out and provide research to mutual funds and other institutional investors.

AAPL was one of those 20 companies. And I knew it well. I’d arrive at the office each day at 6:00 am to see if there was any news that required a note and update to the model. I spent every day researching the company – its financials, products, supply chains, and competitors. I could tell you Apple’s sales by geography, gross margins by product, and details of the company’s financial statements.

And yet, even at my highest level of conviction in the company, I would never have held more than, say, 10% of my portfolio in it.

The purpose of this note is not to make a call on the stock. This is a call on intelligent portfolio construction in light of what we think are grievous errors many amateur investors are making.

In more than two decades of professional experience, I’ve learned that more often than not, the market is right.

And the market is telling us that AAPL is worth 5.5% of the US equity market, not 50%, not 25%, not 15%.

So why do we see risk in concentrated Apple positions?

Remember GE?

In 1993, GE became the largest company in the US. It held that spot (with a brief unseating from AT&T) until 1998. Jack Welch was named manager of the century and the company was a market darling. Microsoft took the top spot until the tech bubble crashed in 2000. GE regained its top spot until 2005 when it was ousted by ExxonMobil.

If you invested $1 when GE hit number one in September 1993, you’d have $3.33 today. Slightly outpacing inflation.

If you invested in SPY, an S&P 500 ETF, you’d have $15.23.

If you invested in GE when it hit its high in 2000, you would have lost more than 60% of your investment value, while the S&P 500 Index has more than quadrupled.2

Falls from grace like this have happened many times throughout stock market history.

A recent paper by BlackRock looks at this phenomenon more broadly. The study concludes that, on average, massive winners don’t keep winning. If you build a portfolio of the 25 stocks that performed best over the last 10 years, history tells us that in the next 10 years, you should expect to underperform the broad market.

The largest company in the world can’t continue to grow faster than all other companies indefinitely. By tying up so much capital in the largest company in the world, we believe Apple-lovers are forgoing the opportunity to own the next cohort of winners.

Have these investors sat at the poker table a little too long? We fear in the future, they may regretfully ask themselves, “why didn’t I leave when I was up?!”

One hesitation might be taxes.

How do you sell a stock with massive capital gains liability attached?

At Target Rock we have several strategies to handle this situation.

As we highlighted in our last newsletter, we now offer in-house direct indexing.  This strategy can generate tax losses to offset capital gains (like you might have in AAPL) while tracking the performance of a broadly diversified market index.

If you are loaded up on a single stock – by means of a love affair with AAPL, compensation from a current or former employer, or gift from a relative – let’s make a plan.




1 Based on percent holdings in IVV, ITOT, ACWI, ETFs representing the S&P 500, S&P Total Market Index, and MSCI ACWI Indices

2 Morningstar, 9/30/1993 to 2/16/2023 and 8/31/2000 to 2/16/2023

Standardized performance figures as of 2/16/23: 1 Year; 3 Year; 5 Year; 10 Year – GE -2.23%; -0.93%; -2.82%; -2.87%. SPY -7.09%; 8.27%; 10.25%; 12.45%.