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Should You At All Dump Apple ETFs Following Buffett?

Sanghamitra Saha

Apple AAPL may lose all its sweetness in the near term as billionaire investor Warren Buffett has dumped it. Buffett’s Berkshire Hathaway Inc.’s BRK.B latest quarterly 13F filings with the SEC show that more than 750,000 shares of Apple were sold in the third quarter.

But does Apple stock deserve this negligence? Let’s find out.

Apple Looks a Bit Overvalued But Offers Growth

Going by valuation metrics, P/E (ttm) of AAPL is 22.2 times versus the industry-average of 19.1 times. Forward P/E of AAPL is 19.9 times versus the industry score of 19.2 times. Price/Book ratio of AAPL is 12.9 times versus the industry average of 6.6 times. Price/Sales ratio of AAPL is 4.6 times versus the industry average of 2.8 times.

Though these measures point to a higher valuation of Apple than the industry, a higher P/E is always not a sign of worry. It shows investors’ confidence in a particular stock within the bunch.

Investors should note that return-on-equity of Apple is 53.8%, higher than industry average of 44.2%. Plus, both return-on-assets and return-on-capital of Apple are above the industry measures. The estimated 3-5-year EPS growth of Apple is now 10.7% versus 7.7% of the industry measure.

For the December quarter, earnings growth expectation for Apple is 8.4% versus 1.2% of the industry. Revenue growth expectation of Apple (4%) is almost in line with the industry (4.1%).

Solid Holiday Season Buying in the Cards?

At its September hardware event, Apple launched a set of new iPhones — iPhone 11, the iPhone 11 Pro, and the iPhone 11 Pro Max — at lower prices. After years of high pricing, the gadget maker is now shifting its strategy toward low-pricing models in order to fight declining iPhone sales and stay competitive in the market. Apple CEO Tim Cook said initial sales were off to a “very strong start.”

Apple Assembler Hon Hai Precision Industry Co came up with upbeat earnings, “indicating solid demand for Apple’s iPhone 11 range.” iPhone shipments are now expected to return to growth in 2020. “The lower pricing of the iPhone 11 has been effective in driving demand past the Street's expectations."

J.P. Morgan also expects Apple selling 3 million more iPhones than expected in the final quarter of 2019. Also, the expected launch of a lower-cost smartphone, iPhone SE 2, in early 2020 should create "more stable near-term conditions" for the Apple stock.

Solid Q4 Earnings Results

Apple reported its fourth-quarter fiscal 2019 results, wherein it topped both earnings and revenue estimates and offered an upbeat holiday quarter outlook. Earnings per share came in at $3.03, beating the Zacks Consensus Estimate by 19 cents and improving 4% from the year-ago earnings. Revenues rose 2% year over year to $64 billion and edged past the estimate of $62.45 billion. This represents the highest Q4 revenues ever (read: Take a Bite of Apple With These ETFs Post Solid Q4 Results).

Still, investors who want to take a cautious stance on Apple due to Buffett’s divestment, can resort to a basket approach. To tap this, investors can play Apple-heavy ETFs as the basket approach lessens company-specific risks.

ETFs in Focus

Below we highlight five funds having Apple as the top or second firm with a double-digit allocation and a Zacks Rank #1 (Strong Buy) with a Medium risk outlook:

Select Sector SPDR Technology ETF XLK

This most-popular technology ETF has $24.7 billion in AUM and charges 13 basis points (bps) in fees per year from investors. AAPL occupies the second position and makes up for roughly 19.3% of assets (read: ETFs to Buy on Phase 1 of U.S.-China Trade Deal).

Vanguard Information Technology ETF VGT

This fund also targets the broad tech sector with Apple as the top firm holding 17.4%. It has amassed $24.9 billion in its asset base while charges 10 bps in annual fees (read: 3-Year Scorecard of Trump Presidency: 5 ETFs Up At Least 100%).

MSCI Information Technology Index ETF FTEC

With AUM of $2.8 billion, the product allocates 17.9% in the second holding Apple. The ETF has 0.08% in expense ratio.

iShares Dow Jones US Technology ETF IYW

This ETF provides investors exposure to the broad technology stocks, charging investors 42 bps in annual fees. Here, Apple is the second firm and accounts for 17.1% allocation. The fund has AUM of $4.5 billion.

Invesco QQQ QQQ

This ETF provides exposure to the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization, with Apple as the first firm, which accounts for 12.15% share in the basket. It has $82.3 billion in AUM and charges 20 bps in fees per year.

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Apple Inc. (AAPL) : Free Stock Analysis Report
 
Technology Select Sector SPDR Fund (XLK): ETF Research Reports
 
Vanguard Information Technology ETF (VGT): ETF Research Reports
 
Fidelity MSCI Information Technology Index ETF (FTEC): ETF Research Reports
 
iShares U.S. Technology ETF (IYW): ETF Research Reports
 
Invesco QQQ (QQQ): ETF Research Reports
 
Berkshire Hathaway Inc. (BRK.B) : Free Stock Analysis Report
 
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