The market takes a bite out of Apple

As I am writing my column today (Thursday), the stock market is still begging for attention. This time, it’s Apple.

Apple closed at $157.92 on Wednesday and opened the next day at $143.98 after falling more than 8 percent in the after-hours market. By Thursday’s close, the stock had fallen close to 10 percent.

The trigger? A Jan. 2 letter from Apple’s CEO, Tim Cook, released on Apple’s website and attached as an exhibit to Apple’s Form 8-K filed with the U.S. Securities and Exchange Commission. The letter revised guidance for the upcoming quarter.

“When we discussed our Q1 guidance with you about 60 days ago, we knew the first quarter would be impacted by both macroeconomic and Applespecific factors. Based on our best estimates of how these would play out, we predicted that we would report slight revenue growth year-over-year for the quarter.”

Now the trajectory was shifting ... downward. And this was not the norm for Apple. As Wall Street Journal reporters Robert McMillan and Tripp Mickle put it: Apple “slashed its quarterly revenue forecast for the first time in more than 15 years.”

Quoting Cook’s letter, “Today we are revising our guidance for Apple’s fiscal 2019 first quarter, which ended on Dec. 29. We now expect the following:

“Revenue of approximately $84 billion.

“Gross margin of approximately 38 percent.

“Operating expenses of approximately $8.7 billion.

“Other income/(expense) of approximately $550 million.

“Tax rate of approximately 16.5 percent before discrete items.

“We expect the number of shares used in computing diluted EPS to be approximately 4.77 billion.”

Cook continued: “Based on these estimates, our revenue will be lower than our original guidance for the quarter, with other items remaining broadly in line with our guidance. While it will be a number of weeks before we complete and report our final results, we wanted to get some preliminary information to you now. Our final results may differ somewhat from these preliminary estimates.”

That was enough. Sellers acted.

When a stock owned by millions of investors changes course this abruptly, it’s a learning opportunity. As someone who runs a money management firm, it’s not my place to give you any opinions on what investors should or should not do on a particular stock, so I won’t. (Plus, in full disclosure, my firm does own a very small position in the stock.)

Instead, I’d like to focus on two things: exposure and expectations.

If you own Apple directly, don’t forget that you may own Apple indirectly as well. For example, the S&P 500 has an Apple weight of about 3.4 percent. A tech sector exchange-traded fund might own a large percentage, perhaps 16 percent or more. If you own Berkshire Hathaway shares, you own Apple indirectly. Then think of the suppliers that support Apple, such as chip companies. So, the question you need to ask is, are you overexposed?

As to expectations, don’t forget that Apple and the other FAANG stocks moved the broad market on its upswing, given lofty expectations for growth. Apple peaked on Oct. 2, 2018, at $232, before falling 39 percent.

What about the other FAANG stocks? Facebook is down 40 percent from its 52-week high. Amazon is down 27 percent, Netflix is down 36 percent, and Google (Alphabet) is down 21 percent. The S&P 500 is down 17 percent from its 52-week high.

We don’t know if the market overreacted or underreacted on Apple’s revised forward estimates. Only time will tell.

In the meantime, what’s an investor to do? That will depend on his or her personal experience and objectives. Do your research, limit your single-stock exposures, and make sure you understand the risk you’re assuming — with any investment.

You can read Apple’s 8-K at tinyurl.com/y7l9dqe7

On another note: Investing for retirement through a 401(k) is a far different exercise than buying stocks and bonds through a taxable account. In a future column, I’ll discuss rules to follow to maximize opportunities that 401(k)s offer, one of which is how to handle a down market. Some bail. If you participate in a 401(k) plan at work, I’d like your views on the subject. Email me at readers@juliejason.com.