Your best bets to cash in on the latest iCraze may be with stocks of companies that make parts for it. There are several, and at least one looks like a buy right now, writes Jim Jubak, also of Jubak's Picks.
What is the best way to play Apple and the success of the iPhone 5? I'd suggest that maybe it's not by buying shares of Apple itself.
By buying shares of suppliers to Apple (AAPL)—what I'd call the Apple sphere-of-influence stocks—that are also big suppliers to Apple's fierce competitors, such as Samsung (SSNHY), investors can get the benefit of any return of market enthusiasm for Apple on the company's October 25 earnings report and profit from growth in the smartphone and tablet sectors, no matter which company comes out momentarily ahead.
In this column, I'll give you five suggestions for stocks where the Apple and Samsung spheres of influence overlap. But let me start with the phenomenon that is Apple and the idea of a sphere of influence in the stock market.
More Than a Single Stock
What is Apple? Of course, it's an individual stock, and a handsomely profitable one to investors who have held it for the past 12 months. Despite the shares' recent correction from the 2012 high of $702 to the October 10 close of $641, Apple's stock is still up 66% in the past year.
But at a market capitalization of $600 billion, Apple's effect on the market is greater than that of any other single stock. It's not a market sector, but the stock has the clout of one.
This single stock carries a weighting of 24% in the Standard & Poor's technology index. That's more than three times the weighting of Microsoft (MSFT) or IBM (IBM).
It's no coincidence that Apple peaked at $702 on September 18, and the technology-heavy Nasdaq Composite peaked at 3,184 on September 14 and essentially held at that level until September 21. Since then, Apple shares are down 8.7% through the close on October 10, and the Nasdaq is down 4.1%.
(Five technology stocks make up about half of the Nasdaq-100 index—Apple, Google (GOOG), Microsoft, Intel (INTC), and Oracle (ORCL).)
But Apple's influence on stock prices extends even beyond the effect you'd expect from the stock with the market's biggest market capitalization. Apple is the center of a web of suppliers, assemblers, and retailers.
For example, chip makers such as Broadcom (BRCM) and Qualcomm (QCOM) see their revenues climb as Apple sells more iPhones. Their shares rally when forecasts for Apple's sales of the iPhone 5 climb from 30 million units in 2012 to 40 million to 50 million and beyond.
And they fall when Wall Street analysts think better of their enthusiasm and cut their projections from 53 million units in 2012 to a mere 49 million, as happened in recent days. Again, it is no coincidence that shares of Qualcomm have fallen 8.1% from September 18 to October 10, essentially tracking Apple's performance.
I think you can call this set of companies and stocks that are linked with Apple, Apple's sphere of influence. These are stocks whose performance depends, to some degree, on Apple's sales and revenue—and the ebb and flow of market perception and forecasts about Apple.
Shares of Broadcom, for example, were down 10.8% in this same September 18-to-October 10 period because of the company's link to Apple. And the shares fell even harder than Apple's, because Broadcom had been seen—and had been bid up—as one of the biggest winners from Apple's iPhone 5 design.
The company retained its previous design wins worth about $3 to $5 per phone, and then added a win for the trackpad controller, worth about $3 per phone.
5 Almost-Apple stocks
There's one major difference between Apple itself and the Apple sphere-of-influence stocks. Apple and Samsung are locked in a fierce battle for smartphone market share. When Apple wins, Samsung loses, and vice-versa.
But Broadcom, to take one example of an Apple sphere-of-influence companies, wins when either competitor wins, because it sells chips to both. Broadcom chips show up in the iPhone and the iPad, and in Samsung's Galaxy S III. In 2011, Apple accounted for 13.1% of Broadcom's revenue, and Samsung 10%.
You can see the same overlap of the Apple and Samsung spheres of influence at Qualcomm, which has an overlap with Nokia (NOK) and the Microsoft Windows Phone platform thrown in. (Qualcomm's presentation at the Sterne Agee technology conference in May, for example, is illustrated with photos of phones from Apple, Samsung, Sony Ericsson, Nokia, and others.)
But it's not only these well-known chip makers that participate in these overlapping spheres of influence. For example, Skyworks Solutions (SWKS) and Avago Technologies (AVGO) provide power amplifiers (RF chips) that boost the signals from wireless devices to cell towers.
Basic wireless phones have one chip—at a cost of about $1—that allows them to operate on a single network. Smartphones have multiple chips and additional chips as part of their 4G/LTE capabilities. (Skyworks has two chips in the iPhone 5, and Avago has components in it as well.)
This sphere of influence overlap isn't just for chip makers, either.
One of the more interesting overlap plays is Japan's Tatsuta Electric Wire & Cable, which trades as 5809.JP in Tokyo. Among other things, Tatsuta makes electromagnetic wave shielding film, a thin layer of insulation used in smartphones and tablets.
A smartphone might use films costing about 25 cents, but because Tatsuta has demonstrated to Apple and Samsung that it can rapidly ramp up production—without quality problems—to meet surges in demand, the company makes near-monopoly margins.
Tatsuta's electronic materials unit saw a 33% operating profit margin in the March quarter of 2012. Sales of shielding film show a 0.9 correlation with shipment volume and surface area in smartphones and tablets, according to Credit Suisse.
So Which to Choose?
Which one of these five overlap plays you decide to add to your portfolio depends on your tolerance for volatility. The more closely a stock is identified with Apple, the more it rides the volatility of that stock.
Right now, after the current correction in Apple shares (which may or may not be over), Broadcom and Qualcomm look especially attractive because they've pulled back with Apple.
I'm adding Qualcomm to my Jubak's Picks portfolio. From the October 10 close to my 12-month target price of $82.50 is a potential gain of 38%.
A stock like Tatsuta Electric, on the other hand, is looking at a smaller potential gain over the next year—17% by my calculations—because just about nobody connects the stock to Apple. But for that same reason, the potential gain would likely come with much less volatility.
And don't forget Apple itself. The stock, already a member of my Jubak's Picks portfolio, shows a potential 18.6% gain to my target price of $760 from the October 10 close at $641.
