Buffett’s Berkshire Hathaway just bought 75 million more shares of the iPhone maker.
Investors with 401(k)s have a lot at stake in Apple’s race to become the first company with a $1 trillionÂ market value.
Just like a bettor with cash riding on Kentucky Derby winner Justify in Saturdayâs Preakness, there’s real money on the line.Â Apple, worth roughly $916.4 billionÂ according to Bloomberg, is the world’sÂ most-valuable company, giving itÂ some serious economic horsepower.
Not only do tens of millions of Americans use Apple products such asÂ the iPhone and iPad, the stock is also one of the most popular and frequently traded. The companyâs swelling market value now accounts for 4.1% of the Standard & Poorâs 500, the biggest weighting in the large-company stock index. That means investors who donât own an iPhone or never bought a single share of Apple on their own, but who have S&P 500 index funds or exchange traded funds in their 401(k)s, still have big exposure to the company.
And that exposure could soon get bigger as the company approaches the $1 trillion dollar market cap.Â Each share of Apple, which roseÂ 0.9% to close at $188.18 Wednesday, would need to climb to about $197.24, or another 4.6%, to reach the historic milestone.
Mutual fund giant and leading index-fund provider VanguardÂ owned nearly 349 million Apple shares at the end of 2017, or roughly 7% of all outstanding shares â the most of any financial firm. BlackRock, the worldâs largest money manager and a major player in the ETF business, owned 6.3% of the company.
So if an investor can’t come up with $188.18Â to buy a singleÂ share of Apple for their own brokerage account, they will still own Apple stock if they invest in index funds that do own shares.
âSo many investors have skin in the game with Apple,â says Chris Rupkey, chief financial economist at MUFG, a New York-based financial firm.
Many Wall Street analysts, including Angelino Zino of New York-based research firm CFRA, see Apple making history soon. Zino said he sees Appleâs share price rising to $210 in the next 12 months, which would push its value above $1 trillion.
Its closest challengers, Amazon, Alphabet, andÂ Microsoft,Â are still about $250 billion shy of the mark.
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Working in Appleâs favor are an array of bullish drivers, including record earnings in the first quarter, its plans to buy back $100 billion of its own sharesÂ and a lineup of products, from the iPhone to its iCloud service, with strong future earnings power, says Thorne Perkin, president of New York investment firm Papamarkou Wellner.
Apple also recently received a ringing endorsement from billionaire investor Warren Buffett, who boughtÂ 74.2Â million more Apple shares in the first quarterÂ of 2018Â and told CNBC he would âlove to own 100%Â of Apple stock.â
Hereâs a few key things 401(k) investors need to know about Appleâs impact on its own bottom line:
The index effect
Investors who own funds such as the Vanguard 500 Index Fund or the SPDR S&P 500 ETF â funds that mimic the S&P 500 stock index and match its returns âÂ should be aware that Apple has the biggest impact on fund performance.Â The reason: The S&P 500 is a price-weighted index, which means stocks with the biggest market values move its daily price the most.
âYour fortunes are more tied to this company than any other,â says Christian Thwaites, chief strategist at investment advisory firm Brouwer and Janachowski in Mill Valley, Calif. Investors who own individual shares of the stockÂ and index funds have even more tied up in Apple.
Sign of a top?
Just as thereâs talk of aÂ market top when the Dow Jones industrial average hits a level such as 25,000, the same holds true when a company such asÂ Apple hits a milestone Wall Street has never seen before.
It’s the type of event that can get investors squeamish about a potential peak in aÂ stock or the broader market, Thwaites warns. It could become a reason why some investors will want to take Apple and the market back down, he adds.
On the flip side, Apple topping the trillion-dollar markÂ could be a bullish trigger, Perkin counters.
âItâs something to cheer, and it could encourage further investment,â Perkin says.
Is it a reason to sell?
Market value alone isnât a big enough signal to call a top in an individual stock, says Michael Farr, president and CEO of money-management firm Farr, Miller & Washington in Washington, D.C.
âI canât imagine setting a market cap as a trigger for sale (of a stock),â Farr says. âMarket cap doesnât make something expensive.â
What does make a stock expensive is when its price relative to earnings climbs much higher than historical normsÂ and it becomes much more expensive relative to the broad market, he adds. Right now, Apple is trading at 18.2 times its earnings over the past four quarters, which is cheaper than the S&P 500âs price-to-earnings ratio of 19.5, according to Thomson Reuters.
Thereâs no reason to sell, Farr says, if the stock isnât overly expensive or having other problems.
Still, Appleâs ascent toward $1 trillion in market value is a sign that it has grown so large that keeping up its rapid growth pace could get more difficult.
And that, MUFGâs Rupkey says, is a risk.
“”At some point soon, it just isnât going to grow as fast, and that increases the danger that investors are paying too much for future earnings,â Rupkey explains.
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