apple 401(k) investors have big stake as Apple races toward $1 trillion stock

401(k) investors have big stake as Apple races toward $1 trillion stock


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Buffett’s Berkshire Hathaway just bought 75 million more shares of the iPhone maker.
USA TODAY

Investors with 401(k)s have a lot at stake in Apple’s race to become the first company with a $1 trillion market value.

Just like a bettor with cash riding on Derby winner Justify in Saturday’s Preakness, there’s real money on the line. Apple, worth roughly $916.4 billion according to Bloomberg, is the world’s most-valuable company, giving it some serious economic horsepower.

 

Not only do tens of millions of Americans use Apple products like the iPhone and iPad, the stock is also one of the most popular and frequently traded. The company’s swelling market value now accounts for 4.1% of the Standard & Poor’s 500, the biggest weighting in the large-company stock index. That means investors who don’t 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. Each share of Apple, which rose 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 Vanguard owned nearly 349 million Apple shares at the end of 2017, or roughly 7% of all outstanding shares — the most of any financial firm. BlackRock, the world’s largest money manager and a major player in the ETF business, owned 6.3% of the company.

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So if an investor can’t come up with $188.18 to buy a single share of Apple for their own brokerage account, they will still own Apple stock if they invest in index funds that do own shares.

“So many investors have skin in the game with Apple,” 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 Apple’s share price rising to $210 in the next 12 months, which would push its value above $1 trillion.

Its closest challengers, Amazon, Alphabet, and Microsoft, are still about $250 billion shy of the mark.

More: Apple inches towards being the first $1-trillion company, helped by Buffett and earnings

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Working in Apple’s favor are an array of bullish drivers, including record earnings in the first-quarter, its plans to buy back $100 billion of its own shares, 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 bought 74.2 million more Apple shares in the first quarter of 2018 and told CNBC he would “love to own 100 percent of Apple stock.”

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Here’s a few key things 401(k) investors need to know about Apple’s impact on their own bottom line:

The index effect

Investors who own funds like the Vanguard 500 Index Fund or the SPDR S&P 500 ETF – funds that mimic the S&P 500 stock index and match its returns — should be aware that Apple has the biggest impact on fund performance. 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.

“Your fortunes are more tied to this company than any other,” says Christian Thwaites, chief strategist at investment advisory firm Brouwer and Janachowski in Mill Valley, Calif. Investors who own individual shares of the stock and index funds have even more tied up in Apple.

Sign of a top?

Just as there’s talk of a market top when the Dow Jones industrial average hits a level like 25,000, the same holds true when a company like Apple hits a milestone Wall Street has never seen before.

It’s the type of a event that can get investors squeamish about a potential peak in a  stock or the broader market, warns Thwaites. 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 mark could be a bullish trigger, counters Perkin.

“It’s something to cheer and it could encourage further investment,” Perkin says.

Is it a reason to sell?

Market value alone isn’t 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.

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“I can’t imagine setting a market cap as a trigger for sale (of a stock),” says Farr. “Market cap doesn’t make something expensive.”

What does make a stock expensive is when its price relative to earnings climbs much higher than historical norms, 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 500’s price-to-earnings ratio of 19.5, according to Thomson Reuters.

There’s no reason to sell, Farr says, if the stock isn’t overly expensive or having other problems.

Still, Apple’s 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, says MUFG’s Rupkey, is a risk.

“”At some point soon, it just isn’t going to grow as fast and that increases the danger that investors are paying too much for future earnings,” Rupkey explains.

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