Market Insights & Analysis from Kramer Capital Research

The Fed Gives Unto Apple What the Trade War Takes Away

In many corners of Wall Street, Apple Inc. (NASDAQ:AAPL) has become a good, but slightly dull, stock because of the sheer amount of cash and controversy it takes to get a $900 billion behemoth moving.

That’s why this week’s seven-percent surge and slide feels so unreal. One day’s rally created $50 billion in wealth for shareholders, while the subsequent plunge took all that money away plus another $30 billion.

And it’s all about conflicting takes on the company’s role in a shifting global landscape. Never forget that while Americans love the Apple experience, this company remains export-oriented and, even more, relies on imports to keep the iPhones circulating.

The Fed Was Our Friend

I should have known it was going to be a wild week when I went in to do a media segment prepared, as requested, to talk about the Fed and the rate cut, only to end up talking about emerging markets when I went on the air.

A more relaxed Fed posture was a great thing for Apple, not because CEO Tim Cook really worries about interest rates, but because the company does 60 percent of its business overseas. With other central banks letting rates drift below zero, the hawkish Fed contributed to what always was a painfully strong dollar for U.S. exporters. Early in the 2Q19 earnings cycle, half of all S&P 500 companies warned that exchange rates were choking their ability to compete.

As far as they can see, the trade war isn’t really the problem. Even adding up all the complaints about the Fed, China and tariffs still doesn’t come close to the weight of a dollar that’s too strong.

Apple mentioned “foreign exchange” six times in the conference call. The U.S. dollar apparently cost them $1.5 billion in revenue and was going to present another $1 billion in top-line drag in the current quarter.

That’s why the stock initially rallied to $219 a share. I was convinced exporters were going to get a break. And then, of course, those emerging markets bit back, erasing all the gains while the dollar jumped to a two-year high.

Evidently, an escalating trade environment outweighs currency relief. Easier local pricing doesn’t provide much competitive help when your products could be banned at any time in China, which is still one of Apple’s key markets.

But that’s in the hands of the negotiators. I’m more interested in factoring out the export market and focusing on the piece of the puzzle Tim Cook actually can control — where he buys components to get the most bang for his strong buck.

I like Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) here. The company makes the microprocessors embedded in all iPhones since 2016. 

And, surprise, it’s not based in mainland China. Tariffs don’t apply here. Apple’s supply dollar stretches farther beyond the threat of government barriers on either side.

As long as that’s the case, TSM has a friend for life. It reported solid 2Q19 numbers as the new iPhone manufacturing season gets underway. That’s likely to continue.

Unfortunately, I’m not convinced the strength flows both ways. While Apple pulls components from 67 factories across Taiwan, that’s really cold comfort when mainland suppliers still outnumber their island counterparts by a ratio of nearly 6 to 1.

Even so, it’s good to see at least one stock somewhere in the world remains a net beneficiary of all the cross currents roiling the market right now. Now it’s time for Tim Cook to step up and shift more supply lines to Taiwan, Japan, Korea and even back to the U.S.A.

Cook may no longer run the kind of disruptive company GameChangers subscribers have come to know and love, but at least he can cover his vulnerability while waiting for the export environment to improve.

CANNABIS CORNER: THE PROOF IS IN THE NUMBERS

Never mind compliance failures and executive meltdowns elsewhere: today proved that well-run cannabis companies still have what it takes to keep the cash flowing through the storms.

I haven’t talked about Aphria Inc. (NYSE:APHA) much here because it isn’t as popular as the headline-cultivating companies like Aurora Cannabis Inc. (NYSE:ACB), Tilray Inc. (NASDAQ:TLRY) and Cronos Group Inc. (NASDAQ:CRON).

And it definitely isn’t facing the same regulatory nightmare as CannTrust Holdings Inc. (NYSE:CTST), which sank another 2 percent this week and dragged the mood around the group down with it.

APHA stuck to its comfort zone supplying the relatively mature medical marijuana channel, leaving a lot of the more volatile recreational opportunities to other growers.

As a result, sales only expanded 630 percent in the recent quarter to $54 million. I was hoping for another $7 million, but realistically speaking for a company that was only booking $2 million a month in revenue a year ago, this is still a fantastic number.

The shortfall (such as it is) looks like a temporary glitch. Management says the business should generate as much as $525 million next year, roughly in line with my forecast. In 18 months, we’ll be looking at an annualized run rate of $750 million.

These are the huge growth numbers that drew me to this theme in the first place, finally playing out in real time and not just hypothetical projections. And while I was braced for a loss of $0.02 per share, Aphria gave us a $0.16 profit.

Forget the scandals and second-guessing around other companies. Aphria kept its nose clean, and shareholders are reaping the rewards now. Regulators even say the company packages the highest-quality products in the business. 

Management, for their part, sees unlicensed pirates as their biggest real competitors for the buttoned-down medicinal market. Sooner or later, those rivals will get shut down.  

Is it any wonder this stock is up over 30 percent today, pulling the group up in its wake? Aphria is back up for the week when the rest of Big Cannabis is struggling or in free fall.

And I have to admit, I’m so fond of this stock because it was the only Big Cannabis stock I’ve seen fit to add to the Turbo Trader Marijuana Millionaire Portfolio. The others just didn’t make the grade.

There’s good reason for that. Since subscribers got their first look at Aphria, it’s made money. Over that same time period, ACB and TLRY are down about 15 percent. CGC has lost 26 percent. Even the S&P 500 is down.

We know a winner when we see it. I expect it to get even better from here.

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Hilary Kramer
Legendary Wall St. trader Hilary Kramer

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