An Apple a Day Does Not Go Away

 

Market Scorecard


The oil price seems like a good barometer of global sentiment at the moment. Over the last week it has been steadily increasing as we hear about more countries reducing their lockdown measures. Along with a rising oil price we are also seeing a rising copper price and rising equity prices. Yesterday saw the rising tide slow a bit with a weak US private sector employment read. On the positive side, China reported stronger than expected export data. As long as things are uncertain, markets will be volatile.

Yesterday the JSE All-share closed up 1.32%, the S&P 500 closed down 0.07%, and the Nasdaq closed up 0.51%.

Company Corner


 

One thing, from Paul

Apple had first quarter results out last week. The numbers were fine, and the stock price is above $300 again. The all-time high is $327.85. Not far to go!

There was obviously some sales impact of Covid-related Apple store shutdowns around the world, but they were not as severe as expected. Lots of iPhones, iPads, AirPods and Macs were sold online and delivered by courier. The services business did well, and April was the strongest month on Apple’s App Store in the last two and a half years.

At the results presentation, CEO Tim Cook rejected the idea that they should retool their supply chain as a result of Covid. When the virus shut down China in February, Apple was criticised for being too reliant on that country for the final assembly of its key products. He pointed out that the production system is back up and running now, demonstrating its resilience.

The new flagship 5G iPhone models expected later this year have had their release dates pushed out by about a month, but should still be available to sell in the critical year-end holiday season. Working from home has resulted in a surge in demand for the new Apple MacBooks.

The company declared a dividend of $0.82 per share for the quarter, an increase of 6 per cent. The annual dividend yield is about 1.1%. Significantly, the board authorised an additional $50 billion for share buybacks. Although this is less than the $75 billion and $100 billion authorised in the two previous years, the CFO Luca Maestri pointed out the company still has $40 billion left over from last year. So in reality they have $90 billion of buyback “firepower” on hand.

I know that some people are critical of companies that use their cash reserves to buy back shares. When companies do this, and then fall on hard times (and the share price goes much lower) it looks ridiculous. That has not happened to Apple. They have historically bought back shares at much lower prices. I really like the idea of weak shareholders being flushed out, leaving those of us with a long-term view to enjoy a higher portion of annual profits.

Apple is the most valuable aggregate holding in our client portfolios, and looks set to stay in that prime position. It really is a stock that every investor should buy and hold. The more, the merrier!.


 

Byron’s Beats

Last week Amgen released solid results. Sales increased 12% year on year to $6.1bn. Some of the their up and coming blockbuster drugs had a good quarter. Repatha which treats cholesterol increased sales by 62%. That is one of their potential rockstars.

All eyes were on Otezla, a drug that treats plaque psoriasis after they bought its rights for $13.4bn last year. Positive data was released form a phase 3 trial which could lead to a label expansion.

Let’s not get too technical before I lose you. Earnings increased by 17% to $4.17 a share. Annualise that and the stock trades at 14 times earnings. But annualising one quarters results in a period like this is dangerous. Fortunately for a company like this, guidance was given and even more importantly, it was unchanged. With everything going on, they don’t expect any decline in sales and profits. That is the type of company you want to be invested in and why Amgen is back at its February levels.

They do plan leveraging off their very strong immunology and antibody expertise to help fight COVID-19. They plan on spending an extra $100m doing this.

The healthcare sector is a good place to be invested. No one wants to compromise on taking their medicines during a period like this. Amgen is a large business with a very strong balance sheet. This stock is a core holding in all our portfolios and should be added to at these levels.

Our 10c Worth


 

Michael’s Musings

Should South Africa start quantitative easing (QE)? This is a debated topic that has been growing over the last few weeks. First off, what is QE? Effectively, it is where the central bank starts to buy government debt with the intention of keeping interest rates low on the debt. Like any open market, prices are determined by demand and supply. In the case of debt, if governments needs to spend heavily to stimulate their economy, they go to the market to raise the money. That sudden increase in demand for money from the government can lead to a spike in interest rates – demand is higher than supply. The central bank steps in though, increasing supply to match the increased demand from the government. The result is interest rates stay the same because demand and supply is in balance.

Most people will look at that explanation and say, this is simply printing of money from the central bank. They are correct to a certain level. The reason it is not printing money is because the government still has to pay back the debt with interest.

That sounds like a great and simple way for South Africa to raise money to fund our Covid-19 measures and to lower the high interest rate our government currently pays. It is not so simple though. This is a free and open market, meaning that we need to also consider how other participants will react if the SARB starts QE in a big way. Turkey tried QE a few years ago which didn’t go according to plan. On the announcement of QE, investors started selling Turkish bonds, and the central bank couldn’t buy debt fast enough. The end result is that interest rates went up, not down.

What will your reaction be if you own government debt and hear that the government is going to start spending more thanks to funding from the reserve bank? Most people will get nervous because they are worried that the government will borrow too much, spend the money badly and then not be able to repay the debt. The natural reaction is to then sell your debt, which pushes interest rates on the debt up. It is hard to know which way interest rates will go if the SARB started a big QE program. So for now it will remain a debate.


 

Bright’s Banter

The grocery delivery startup Instacart has joined the likes of Zoom, Microsoft Teams, Spotify, Slack etc. in becoming one of the essential apps needed to survive in this pandemic. Instacart still dominates organic searches in North America if you’re looking for a way to shop for certain items from different retailers.

Instacart added 300 000 new employees in a space of eight weeks. They now employ 500 00 people. Demand for their services shot over the roof and I don’t think the company was ever ready for this kind of surge. The good news is that this company’s value has increased beyond a level that its founders and investors ever dreamed of in such a short period of time.

This business made a surprise profit of $10 million, a first in its history and says that it is on track to process more than $35 billion in grocery sales this year. Put into perspective, that is more than Shoprite, Woolies and Massmart combined. You can imagine that this app of convenience turned into a necessity during these tough times and has saved a lot of lives.

This Bloomberg article covers everything you need to know about the history of Instacart and its performance today.

Linkfest, Lap it up


The global lockdown has exposed potential weaknesses in the food supply chain. One solution is to try crack the formula for economical vertical farming. We are not there yet, but with increased funding it might become a reality soon – Cities are turning to vertical farms to keep their supply chains upright.

Here is a cool look at who our neighbouring countries were a few hundred million years ago – Incredible Map of Pangea With Modern-Day Borders.

Signing off


It is Thursday again which means that we get initial jobless claims data out of the US. In terms of employment data, tomorrow is the big one though, where we get the official unemployment rate for April. The Rand is stable at $/R18.64 and the JSE All-share is higher this morning.

Sent to you by Team Vestact.

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