Choosing Apple (AAPL) as a must-own stock for the next 12 months is no longer comparable to an aging sports star on a big contract who is "mailing it in." In other words, recommending Apple requires some work and basic understanding of potential catalysts.
Jumping into Apple ahead of the New Year requires a reflection on the year that has been, however. Apple's stock has slightly underperformed the S&P 500 this year as the company has dealt with a series of un-Apple like headlines. The Apple Watch is widely viewed as a bust relative to Apple's own product greatness with the iPhone, iPad and iPod.
The Apple Watch sold 1.1 million units in the third quarter, down an astonishing 71% from a year earlier, according to a new report from IDC. Apple CEO Tim Cook moved quickly to refute the report, though his comments still lacked a little credibility, considering the company continues not to disclose Apple Watch sales. "Sales growth is off the charts," Cook said. "In fact, during the first week of holiday shopping, our sell-through of Apple Watch was greater than any week in the product's history. And as we expected, we're on track for the best quarter ever for Apple Watch."
Potentially tepid Apple Watch sales are a black eye for Cook. If he has another major product flop (relatively speaking, as many tech companies would kill for millions of units being sold), some may start to quietly call for his ouster. Then there have been new issues surfacing on Apple's batteries, from iPhones catching fire to weaker-than-advertised life for the latest MacBook Pro. Adding to the concern is the midyear reboot of the company's self-driving car program and slowing sales of smartphones amid a broader industry slowdown.
All in all, a very uncharacteristically mixed year for the tech titan.
Further holding back's Apple stock is the increased attractiveness of others in the large-cap tech space. Under relatively new CEO Satya Nadella, Microsoft (MSFT) has come into favor due to a strong push into the cloud and the perception that it's no longer a sloppy, slow-moving tech monster. Oddly enough, that slow-moving tech titan is now believed to be Apple, rather than Microsoft. Crazy how tables can turn.
Meanwhile, Alphabet/Google (GOOGL) and Facebook (FB) have also received way more love this year than Apple. Google is seen as a near digital monopoly (search) that may end up changing the world with whatever zany products and services are being worked on at its venture unit. Facebook may not be cool with teens anymore, but Wall Street appreciates its impressive user growth, utter social media domination, ability to monetize and steady leadership.
Suffice it to say, Apple is not the sure-fire bet it was in the mid-2000s. As of right now, Wall Street believes Apple's future is like Microsoft under former CEO Steve Ballmer -- milking a cow (iPhone user base vs. Windows) and minus a ground-breaking new product or service.
Hence, there have to be several catalysts on the horizon for Apple's stock to get back to being a major outperformer vs. peers and benchmarks. It doesn't necessarily matter if these three catalysts take hold and drive earnings growth in 2017, they just have to commence in some form to better improve the perception around Apple's future prospects:
Catalyst #1: Trump Tax Holiday
Apple needs to jump-start earnings growth, and President-elect Donald Trump could prove helpful in this regard.
Apple has the most cash overseas of any U.S. company at about $230 billion, according to Moody's, which estimates that offshore holdings for the five largest cash holders will total $505 billion. Total corporate cash held offshore by U.S. non-financial companies is projected to reach $1.3 trillion by the end of 2016.
Obviously, Apple isn't going to bring all of its excess cash back. And what it would bring back may not be deposited in the United States until 2018 anyway given how long it could take for Trump's new laws to be passed. But the tax holiday is coming, and it will inevitably spark speculation on what Apple will do with its hoard.
Apple could juice its buyback program, hike its dividend or buy a Netflix (NFLX) . Whatever it decides, the mere thought of Apple repatriating large sums of money should propel its stock in 2017 and mitigate downside risk from mixed quarters ahead of second-half product releases.
Catalyst #2: The iPhone 8
Count me as perpetually skeptical on Apple product rumors. Although there are entire websites that dedicate themselves to digging up what could be next from Apple, so much of it is pure speculation. Where is that 80-inch Apple TV, people?
But it's reasonable to expect that Apple drops one heck of a new iPhone next year to celebrate the brand's 10-year anniversary. Think curved glass, no home button and God only knows what else. There would be more to it then tapping into some nostalgia.
First, Apple has to go big with new iPhone features to keep its installed base hooked. I am an iPhone user but have recently started testing a new Samsung, and have to say it trumps my iPhone in so many areas. The thing just feels faster. Moreover, Apple has to show Wall Street that it remains a best-in-class innovator, and there is no other product to quiet concerns in that area than significantly enhancing its biggest and most important franchise.
Catalyst #3: Apple is an anti-Federal Reserve stock
The Federal Reserve will be a serious wildcard to stocks next year, which is opposite to the friendly role it has played post Great Recession. For starters, the Fed is likely to raise interest rates at least two times next year to get out in front of natural inflation (caused by the economy improving in 2016) and, though it won't admit this, Trump stimulus package inflation. Additionally, the year is likely to be filled with speculation on the status of Chair Janet Yellen, whose term ends on Feb. 3, 2018.
As a result of this evolving backdrop, companies with high levels of debt and turbulent 2016 performances -- such as dying retailer Sears (SHLD) -- will probably fall out of favor with Wall Street. The same could be said for homebuilders, which may see sales cool down as owning a home becomes more expensive.
In this environment, Apple's strong balance sheet -- along with others in the same mold --- are likely to be rewarded.