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Sacconaghi knocks down theory Apple’s surge due to passive investing, buybacks

Apple CEO Tim Cook greets employees and customers on a surprise visit to the Georgetown Apple store in Washington, DC.

Jabin Botsford | The Washington Post | Getty Images

Apple’s remarkable 12-month run is the real deal and not a technicality due to passive inflows and share buybacks, top tech analyst Toni Sacconaghi says.

The iPhone maker’s shares have doubled over the past year. They have also surged more than 78% since the close of June 3, which was its low point for that month. The stock has also reached record levels, breaking above $300 for the first time earlier this month.

But some skeptics think Apple’s surge is mostly a byproduct of more money coming into passive investment vehicles such as exchange-traded funds as well as the company’s massive share repurchase programs. Sacconaghi, of A.B. Bernstein, disputes this in a note to clients.

“Our analysis doesn’t point to compelling evidence that AAPL’s strength over the last year has been attributable to either buybacks or other technical factors such as the migration to passive,” Sacconaghi said. “Instead, investors’ view that fundamentals are improving – warranting a better multiple – appears to be the key driver of appreciation.”

For years, investors have been taking money out of actively managed funds and buying into passive vehicles such as index funds and ETFs. Equity funds globally saw outflows every year between 2015 and 2018, data from Refinitiv shows. In that time, investors poured at least $107 billion into equity ETFs.

Apple also has a massive influence over widely followed market ETFs, including, the SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ). Within the SPY, which tracks the S&P 500, Apple holds a portfolio weight of 4.8%. Apple also accounts for nearly 12% of the QQQ ETF.

Theoretically, that means Apple gets a big chunk of every dollar flowing into these vehicles.

“When assets move from active to passive, Apple goes from being an underweight among active managers to a market weight,” the analyst said.

However, Sacconaghi points out that flows into passive vehicles were not as strong in 2019 as in previous years, yet Apple still rallied. Equity ETFs saw just over $97 billion in inflows last year while equity funds still had net outflows. He added that about $3 billion in passive money shifted into Apple last year, “which is relatively small in the context of the company’s $1.3T+ valuation.”

Boosted by buybacks?

Another argument Apple skeptics raise is the stock’s gains are largely driven by the company’s massive share repurchase programs. Since December 2015, Apple’s shares outstanding are down more than 21% to about 4.38 billion.

There is no sign the company will slow down its share repurchases anytime soon, either. Apple announced a buyback program of up to $175 billion in common stock.

Sacconaghi acknowledged that share buybacks accounted for 5.6% of Apple’s trading volume in the first nine months of 2019, but noted this is “nowhere near unprecedented.”

“Apple purchased a higher percentage of its own trading volume in FY18 than FY 19, and HPE has repurchased significantly higher relative levels of shares, with no correlation of its share performance,” he said.

Instead, Sacconaghi thinks Apple’s surge happened because investors believe the company’s services and wearables businesses — coupled with the prospect of a 5G iPhone cycle — warrants a higher multiple.

Sacconaghi has been an analyst in the tech industry since the early 2000s and has been consistently named the No. 1 analyst for IT hardware and electronics manufacturing services by Institutional Investor magazine.

Despite all of this, Sacconaghi has a rare market perform rating on Apple, given how high the stock’s valuation is. In a note earlier this week, he said Apple’s earnings multiple is at its highest level since 2010.

— CNBC’s Michael Bloom contributed to this report.

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