Three of our Club stocks — Apple (AAPL), Meta Platforms (META) and Wells Fargo (WFC) — were in the news Monday. Here’s what we think of the developments. The news : Over the weekend, Apple announced that due to Covid restrictions — which have caused resulted in the near complete shutdown of a Foxconn factory in Zhengzhou, China — iPhone 14 Pro and Pro Max production capacity has been “significantly reduced.” However, Apple said it continues to see “strong demand” for both models. As a result of the shutdown, shipments of the two models are expected to be lower than previously anticipated. Ultimately, the dynamic is in line with what we have seen in recent quarters, with Apple simply unable to supply enough devices to meet demand. Though we had hoped these issues were behind us, especially following last week’s news that China was more open to foreign Covid vaccines, we are clearly not out of the woods. Shares of Apple fell 1% on Monday. The Club’s take : That in mind, the two things Apple has also been able to prove consistently over the past couple of years is that (1) logistically, they are the best in the world when it comes to adapting and figuring out how to work around supply chain issues. and (2) extreme customer loyalty results in sales being pushed out rather than not cancelled. That means that any sales lost in a given quarter due to demand tend to be made in subsequent quarters as customers are committed to the ecosystem and willing to wait a little while longer for an Apple device, rather than jump ship for Android. Were this a guidance warning due to waning demand we would be more concerned as supply-side issues tend like the situation here with Apple to result in near-term, temporary hits to the bottom line. Wall Street analysts are, however, revising earnings lower following the news. That reason a demand issue would be much more troubling is that it may point to something more long-term and problematic such as shifting consumer preferences or disruption by competitor. That is not the issue here — and as a result, we maintain our “own Apple, don’t trade it” mantra, believing that any weakness resulting on this near-term issue will ultimately prove a longer-term opportunity as the sales are made up. The news: Meta Platforms moved more than 4.5% higher on news that management may finally be ready to take its medicine and make the difficult decision to start laying off workers in an effort to address costs as a recession appears almost inevitable in the near–to-mid-term given the Federal Reserve’s fight against inflation. The Wall Street Journal reports that Meta could being large-scale job cuts as soon as Wednesday. The Club’s take : While we welcome the effort to reduce costs, though by no means do we take pleasure in layoffs, headcount is only one part of the expense issue plaguing profitability and therefore shares. The other of course being the rate of overall expense growth as management appears intent on sinking tens of billions of dollars into metaverse-oriented investments without the ability to tell investors what the payoff will be or when, if ever, it will come. For reference, revenue declined 4% annually in Meta’s recent quarter and despite a possible recession on the horizon guided for expenses to grow in the mid-teens on a percentage basis in 2023. We therefore maintain our 2 rating despite the positive update for the stock as we simply don’t think any move to the upside will be sustainable should management prove unwilling to at the very least delay a portion of these far out potential growth investments, if not reduce them completely until we start to see some return in the Reality Labs segment. That’s the part of the company devoted to building around the idea of a metaverse. The Facebook-parent have been one of the worst S & P 500 stocks in 2022, down more than 70% year to date. The news : Bloomberg reported this weekend that Wells Fargo is facing pressure from federal regulators to pay more than $1 billion to settle a series of investigations into mistreatment of customers. Any payment of that size deal that would break the Consumer Financial Protection Bureau’s previous settlement record, which also happened to be with Wells Fargo. The Club’s take : Given the muted reaction, we think it’s fair to say that the news doesn’t come as much of a surprise, especially since the bank has already earmarked $2 billion to address legacy issues. If a fine, even one of that big, were to materialize, we think it would prove a positive for the stock because it would put the matter behind us. It doesn’t appear to be of a magnitude unexpected by the bank or the investors. With that in mind, as discussed during Monday’s “Morning Meeting,” could we see a pop in bank stocks should on a Republican sweep of the House and Senate in the midterms happen. We may look to lighten up our exposure as the position now exceeds over 5% of our a portfolio, a threshold level we watch to ensure no one position can too heavily influence the results of the overall portfolio. (Jim Cramer’s Charitable Trust is long AAPL, META and WFC. See here for a full list of the stocks.) 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iPhone 14 phones on display inside an Apple store in Marunouchi, Tokyo.
Stanislav Kogiku | SOPA Images | Lightrocket | Getty Images
Three of our Club stocks — Apple (AAPL), Meta Platforms (META) and Wells Fargo (WFC) — were in the news Monday. Here’s what we think of the developments.
