Frank Curzio's WALL STREET UNPLUGGED Podcast

Dump Apple and Buy These Two Stocks Instead

APTOPIX iPhone Sales

It’s time to take profits on America’s favorite stock.

Apple (AAPL) is the largest company in the world. Its signature products include the iPhone, iPad, Mac computer and soon the iWatch (expected to hit store shelves in April).

These tech gadgets are, or could soon be, among the top-selling products in their respective categories.

It’s no wonder why, then, that many investors look to get positioned before each new Apple product release.

Generally, this strategy has generated some pretty impressive gains during the past several years.

But this time, my research is telling me that the best way to make money in Apple is to cash out now.

Here’s why …

Is Apple’s Monster Run Set to Slow to a Crawl?

The stock has had a monster run since 2010. That’s when I told investors to buy shares in Apple.1857_1x

Then in September 2012, I suggested adding to current positions. That’s when the stock pulled back after reporting weaker-than-expected iPhone 5 sales.

If you followed my recommendation, you are sitting on gains of roughly 282% since my original call.

1857_2xAnd Apple outperformed the S&P 500 index by more than a 3-to-1 margin over this time frame.

Following this huge move, Apple is no longer trading at dirt-cheap levels. Plus, the company is about to see a slowdown in earnings growth — which most bullish investors may be overlooking.

That’s why I’m suggesting investors take profits in Apple.

During the past few years, my thesis on Apple was based on value and growth potential.

After all, Apple was trading at a dirt-cheap price (when factoring in the company’s huge $100 billion-plus cash hoard). That is, compared to other tech giants.

But that big discount is all but gone now.Apple outperforms

IPhone 6: Apple’s Big Home Run 

During the past few years, Apple’s growth was also about to explode. The company was launching its iPhone 5 in 99 new countries in 2012.

Plus, Apple was on the verge of signing a deal to sell its iPhone through China Mobile (CHL). With over 700 million subscribers, China Mobile is the largest wireless company in the world.

To put this massive number in perspective, Apple sold 125 million iPhones in all of 2012.

Now that Apple established itself in so many new markets, it was a no-brainer to expect its new iPhone 6 (and 6 Plus) would be huge sellers.

Apple launched this new phone in September 2014. It has already sold more than 74 million units!

Turning to last quarter’s numbers, Apple generated more than $18 billion in profit.

That’s the most profitable quarter of any company in history!

Apple is on pace to generate more than $8.50 a share in earnings this year (consensus estimate). That’s 33% higher than 2014.

Most large companies would be happy with 7% to 10% growth.

At 33%, this number is unreal — especially for a company the size of Apple.

Using the $8.50 consensus earnings estimate, Apple looks dirt-cheap trading at 16 times earnings (and growing at more than 30% annually).

But let’s take a closer look at Apple’s revenue and earnings going out a few years… 

apple earnings and revenue

These are consensus estimates provided by Thomson First Call.

In short, these numbers are the average revenue and earnings estimates of the 40-plus analysts who provide research on Apple.

As you can see, analysts only expect Apple to grow sales at 7.3% annually from 2015 through 2017. They only expect earnings to grow at 8.7% annually.

That’s much slower than the 33% pace analysts are expecting from 2014 to 2015.

The reason for the slowdown is simple. Apple just had its highest-selling product launch in history. And after a few more quarters, sales of the iPhone 6 will slow as there will be fewer people left to buy this amazing product.

3 Ways Apple Could Outdo Itself Again

Sure, Apple has several growth initiatives that look promising.

No Wallet? No Problem!

apple payThe company launched Apple Pay, a simple and fast mobile-payment service. I think this technology is amazing and could become the standard in most retail stores 5-10 years from now.

But Apple Pay could take a long time to pay off for the company. Analysts expect Apple Pay to generate less than $2 billion in sales by 2017.

 

Remote-Control Your Home

remote control your homeHundreds of millions of people own iPhones and Apple products.

So, it makes sense for Apple to dive headfirst into the electronic-home market (also called Smart Home technology).

So, these customers are likely to keep using Apple’s technology — and upgrading to newer models — to power their thermostats, alarm systems and lights.

However, the entire Smart Home market is expected to grow to $4 billion by 2017.This is according to research firm Parks Associates.

Time Will Tell About ‘Wearables’

apple wearablesApple’s iWatch is expected to make a huge splash when it launches in April.

Yet, the entire wearables market is only expected to top $22 billion by 2020, according to consulting firm Analysys Mason.

If we add Apple Pay, Smart Home and Wearables, this comes out to $28 billion in revenue.

Of course, this assumes Apple will capture 100% of the Smart Home and Wearables markets.

Yet, this barely moves the needle for a company that’s expected to generate more than $225 billion in sales annually for the foreseeable future.

Don’t Look to Macs, iPads for Price Support

Outside of the iPhone, Apple’s next biggest products include Macs and tablets.

But iPad unit sales are expected to decline year-over-year. That’s because new Apple customers are buying big-screen mobile phones (like the iPhone 6 Plus) instead of iPads.

More people are buying Mac computers instead of traditional PCs. However, the entire PC market remains a slow-grower.

Even with more people switching to Macs, unit sales are only expected to grow by less than 5% year-over-year.

These numbers should be difficult for shareholders to ignore.

Yet, they are being masked with exciting headlines of Apple’s new payment service, possible entry into the wearable camera market and blockbuster iPhone sales.

1857_8But the fact is … sales and earnings will slow dramatically starting in 2016.

Sure, Apple can use its $150 billion in net cash to buy into any industry it wants.

After all, rumors are surfacing that Apple may give Elon Musk’s Tesla (TSLA) a run for its money.

That’s because the company reportedly plans to build an electronic car by 2020.

But most of these initiatives will take years to develop.

In other words, these businesses will not become meaningful revenue-generators for Apple.

Nor will they generate enough cash to move the needle for a company with a $760 billion market-cap.

Grab Gains in Apple Now, and Consider These 2 Stocks Instead!

When I say “take profits,” I don’t mean that you should short the stock.

Apple is a great company with great products. But it will probably trade alongside the S&P 500 over the next few years, as its valuation and growth become more in-line with the large-cap index.

Better industry-leading stocks to own are AT&T (T) and General Electric (GE). These companies are cheap, pay high yields and have strong growth components.

AT&T

The mobile wireless giant is about to buy DirecTV (DTV). This will give AT&T, which pays an enormous 5.4% dividend, a huge growth component.

AT&T will save almost $2 billion a year on synergies. More important, AT&T will now have a low-cost video platform to deliver its services by mobile, TV and laptops.

This will be a monster cash flow generator for the company for decades.

GE

If you’re hungry for dividends and growth, consider that industrial giant GE pays a 3.7% yield.

It is also the biggest player in the $30 trillion industrial Internet megatrend. That is, the use of sensors to analyze and interpret data in millions of machines.

This technology is in its infancy …

And by using this technology, hospitals are both saving billions of dollars and attending to more patients. In other words, this gives them the capacity to save more lives.

Medicine is just one beneficiary. Transportation is also making big strides because thanks to the industrial Internet.

It helps railroad companies to monitor the wheels and bearings on locomotives each minute. This helps avoid derailments.

Plus, airlines are monitoring planes in real-time. Any mechanical problems can be dealt with right away — thus avoiding delayed or even canceled flights.

Why I’m Watching These 2 Names Now

AT&T and GE significantly underperformed the markets during the past two years. That’s because they have been spending boatloads of cash to invest in the future.

These investments are about to start paying off for investors. 

That’s probably why insiders have been purchasing shares in these two names over the past few months.

And insiders have been dumping shares of Apple.

If Apple has been a huge winner for you, my recommendation is to take profits now. The company is going to see a huge slowdown in growth, and you can instead put that cash to work in better-performing names.

The much-better plays right now are AT&T and GE. They are cheap stocks, pay higher yields and should grow earnings faster over the next 12 to 24 months.

Good investing,

Frank Curzio