I run a real-money portfolio on Fool.com that focuses on tech investing. As of the close of 2012, the portfolio was running even with the market, both returning about 22.8% since the portfolio's creation. However, a big problem has been the amount of cash I have sitting around. Currently, more than 50% of the portfolio is in cash, which is troubling since cash loses to a market return of 22.8% by ... 22.8%. Take away the high levels of cash I've held, and the stocks I'd purchased would be trouncing the market.
Cash can be a real drag on returns in rising markets. It's easy to look at your returns in a brokerage account, but if you want a full picture of whether your net worth is keeping up with the market, you must consider cash lying around as earning either zero returns, or close to it. That's why I'm going to be placing more money behind two proven outperformers in the portfolio, and another company set to ride the next major trend.
Adding to Apple ...
Not surprisingly, Apple's among my largest holdings. After my initial purchase of Apple back in early 2011, its shares have risen 57% while the Nasdaq saw a respectable 16% rise during the same time frame. That's a performance level any investor should be very satisfied with.
However, the recent pullback has also created opportunity in Apple's shares. At the heart of the matter is that Apple's growth rate is slowing. Mere weeks away from the company's holiday earnings on Jan. 23, Wall Street is predicting a 4% year-over-year earnings decline. Just 90 days ago, the Street was sitting on a prediction of 11% earnings growth.
The culprit behind Apple's sagging earnings expectations isn't necessarily sales; the company is still expected to post 18% earnings growth when it next reports. Instead, shrinking margins are squeezing out profitability. In turn, the focus on Apple's diminished profitability has led to longer-term fretting about diminishing future growth opportunities, especially in smartphones.
There is some validity behind these concerns. Developed-market smartphone growth is slowing. AT&T just announced that it activated 10 million smartphones last quarter. That's a nice, big, round number, but it also means as little as 6% year-over-year growth. Simply put, the eye-popping smartphone growth rates have moved to emerging markets.
Yet other concerns are less valid. Let's take margins. Yes, Apple may show gross margins below 40% this quarter. However, it's also dealing with an unprecedented refresh cycle of products. As CFO Peter Oppenheimer noted on Apple's last earnings call, 80% of revenue in the December quarter will come from products that were new or repriced in a six-week window before late October. That quote leaves wiggle room as to exactly which products he's referring to, but the point is that new products have lower margins that expand throughout their life. With the iPhone and iPad Mini both having challenging ramps, lowered margins in the December quarter should be noted but stand out more as a product life-cycle bump than a major red flag.
Overall, the iPhone still has the highest brand loyalty among smartphone brands. Its growth may lag emerging-market-driven smartphone demand in 2013, but Apple no longer needs 25% iPhone growth each year for its valuation to make sense. Throw in the iPad Mini as a major step toward maintaining Apple's tablet market share lead as that market continues booming, along with a distinct lack of enthusiasm for future product launches and I'm very happy to be paying 12 times earnings for Apple today.
I'll be adding roughly another $1,600 in Apple share to my portfolio tomorrow. That will bring Apple up to 16% of my portfolio, which is quite hefty. However, when you consider that Apple is actually 20% of the S&P 500 information technology index, and I'm focusing solely on tech stocks, that level of Apple is pretty reasonable.
More Cirrus Logic, too
I won't spend as long discussing my second buy, in part because it's an Apple derivative play. I'll be picking up a bit more Cirrus Logic .
The company definitely comes with its risks, as a whopping 79% of its revenues came from Apple last quarter, but it's also been expanding its role in Apple's products.
Simply put, it's a company that's sold off quite a bit recently, and the sell-off has been baffling to me. In the December quarter, Cirrus guided to sales that would be up about 145% year over year on the high end of its guidance. The reason is simple, Cirrus Logic made major gains in the amount -- and value -- of its chips going into the new iPhone 5. Those eye-popping rates will come back to Earth later next year, but by the time they do, the company will be trading at single-digit earnings multiples.
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