Many investors seem to be on the lookout for the next big thing. They want to find the next Warren Buffett or perhaps the next Warren Buffett Stock. They might be on the lookout for the next Microsoft, or the next Google, or the next Apple.
While these are all worthy pursuits, investors should also consider looking out for the next disaster. For example, they could be on the lookout for the next General Electric (NYSE: GE).
The stock suffered an extended sell off over more than two years. It’s important to consider what could have happened to avoid making the mistake of holding on to the next GE.
Investors Ignore the Market, and the News
As the chart above shows, investors in GE didn’t suddenly lose all their money. Some held on in the face of a clearly declining market. When considering why, it’s important to remember that some investors genuinely believe in a company.
One example of investors who believe in a company is retirees who may have obtained a large number of shares while they worked for the company and who believe the company will recover from its problems as it has so many times in the past.
As Forbes noted months ago,
“Many General Electric retirees have hung onto every share of stock the company ever awarded them because they are justifiably proud of their role in building an iconic American company. But, for many, keeping so much GE stock has put their retirement in jeopardy….
GE Retirees Tough Decision
When you are in a hole, the first thing to do is to stop digging.
GE may turn around and be a great investment from here. But, there are many other companies with better prospects.
The first decision you have to make is whether you are ready to sell your GE stock. Even if you just hold onto the cash, you will have started to disentangle your financial future from GE’s and hopefully sleep better.”
When it becomes a tough decision, it could be best to simply make the decision that avoids further decisions. It could be time to sell the stock and move on. That is because of another point that investors must always remember, a bit of humor investment managers often exchange when holding a loss.
The managers often remind each other of how a stock loses 90% of its value. The answer is that the stock loses 50% after dropping 80%. The lesson is that there is never a wrong time to preserve capital because all stocks, in theory, can fall to zero.
The Next GE?
In looking for the next GE, it can be useful to look for a stock that many investors have an emotional tie to. For some reason, some investors are emotional towards Apple (Nasdaq: AAPL). Their ties may be because they love the company’s products or because the stock performed well.
Their emotional attachments can keep them from asking some tough questions. Barron’s recently addressed some of the tough questions analysts are asking about the company:
“Apple’s China problem isn’t getting any better: In fact, it may be worsening, conclude two new research notes.
“The annual rate of decline for Apple iPhones in the month of February (down 67% year-over-year) is similar to the weakness in January and December months,” UBS analyst Timothy Arcuri wrote in a note to clients late Tuesday.
“Without iPhone demand acceleration on the horizon, we currently do not see any catalysts near term to drive significant EPS upside,” Longbow Research analyst Shawn Harrison wrote Tuesday, adding that the iPhone situation in China was going “from bad to worse.”
Of 42 Apple suppliers in the region, Harrison said, 37 of them “reported worse than seasonal sales” in February.
Weak iPhone shipments have undercut Apple’s stock in recent months, highlighted by its struggles in China. Sales of Apple’s flagship product there plunged 20% during the calendar fourth quarter, falling twice as much as the slumping Chinese smartphone market’s sales overall, according to an IDC market research report last month.
Apple’s China woes and softening iPhone sales are reflected in Apple’s bottom line. In January, the company cut its revenue outlook for the first time in almost two decades. (Nearly 20% of Apple’s fiscal 2018 revenue came from China, and iPhones account for slightly more than 60% of total revenue.)
The situation isn’t likely to improve in Apple’s forthcoming fiscal second-quarter results. Analysts expect Apple to report earnings of $2.38 per share on revenue of $57.54 billion, indicating declines of 13% and 5.9%, respectively, from the year-ago period.
Apple had no comment on the research reports, but Chief Executive Tim Cook told analysts during its latest earnings call in late January that iPhone’s global installed base reached a record 900 million in December, up 75 million in the past 12 months.
Analysts are split on Apple’s outlook. According to FactSet, 20 recommend buying shares and 18 recommend holding the stock. Just one firm has a sell rating. The average price target of $179.06 is slightly below Apple’s closing price of $180.91 on Tuesday.
UBS’S Arcuri affirms a Buy on Apple shares and a price target of $185 after “checks in [Apple’s China] supply chain indicate a slightly better tone given recent [iPhone] price cuts.”
Longbow’s Harrison maintained a Neutral rating on Apple shares and said middling iPhone sales shifts more focus to Apple’s March 25 event, where it is expected to announce a video-streaming service and premium magazine subscription plan.
The Stock Shows the Strain
Apple’s market share has been under stress for some time.
The stock price has also been under stress since October.
Investors should consider the question of where they would sell before they enter new positions or even if they have an existing position. The decision of when to sell could be the most important one for investors in Apple right now.
There is no doubt the company’s products have appeal. The question is whether it’s stock can deliver the kind of gains it did in the past. The answer is to prepare for the worst and be ready to avoid the next GE.
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