- Despite the recent pressure on the banking sector, Apple stock remains resilient.
- History suggests that AAPL may continue to outperform banks, even if bank stocks begin to recover. A simulated long-short portfolio from 2005 showed that a bet on AAPL against banks produced massive gains with an annualized return of 21%, uncorrelated with the market.
- While it may be tempting to buy bank stocks on weakness, risk-conscious investors may be better off sticking to well-capitalized and diversified banks. AAPL could still be perceived as a safe haven amid market troubles.
AAPL Weathers The Storm
The banking sector is under pressure once again. This time, the finger can be pointed at Credit Suisse for putting investors on edge once again.
As the SPDR S&P Bank ETF heads lower by more than -3% for the day and -21% year-to-date, Apple stock remains resilient. Shares of the Cupertino company are dropping around -1% this Wednesday morning and remains up strongly for the year, at +20%.
Recent price action is consistent with my article in which I argue that AAPL could be perceived as a safe haven amid troubles elsewhere in the market.
A debate can be had at this point, which some of my readers have already proposed. Is now a good time to “play it safe” and lean towards rock-solid stocks and companies like AAPL? Or is this an opportunity to buy bank stocks on weakness?
Buying Dips Can Be A Good Idea
It is no secret that “buying low, selling high” is a generally good strategy in the markets. I talked about it in the context of Apple stock before.
Since the Cupertino company went public, in 1980, the stock has returned a whopping 34% per year. But when shares were bought following a 15% dip from the top, the forward twelve-month gains were better by 5 percentage points.
If bought after a 30% decline from all-time highs, the forward returns in AAPL were even better on average by nearly 15 percentage points!
The bank ETF is currently down by 40% from the early 2022 peak. Assuming the global financial system does not crumble, there is an argument to be made for buying this sizable dip and patiently awaiting the reward.
Personally, were I to follow this strategy, I would probably stick to a diversified basket of well-capitalized banks with a diversified business model. Betting on this or that underdog, including certain regional banks, implies the assumption of too much risk for my taste.
Looking Back, AAPL Is A Clear Winner
Having said the above, I can also understand and support the case for bypassing banks altogether amid all the turmoil and sticking with a stock like Apple. History clearly supports this strategy.
I ran a backtest that goes back all the way to 2005. In it, I simulated a long-short portfolio: 100% exposure to AAPL, -100% (negative) exposure to KBE rebalanced monthly. With this approach, one is effectively betting that Apple stock can outperform banks.
The results were better than I expected to see. This proposed portfolio would have produced massive gains that are uncorrelated with “beta” in the market – in other words, true alpha generation. The chart and table below were provided by Portfolio Visualizer.
The annualized returns of 21% were outstanding, considering correlation with the S&P 500 of zero. An initial bet of $10,000 on AAPL against banks in 2005 would have grown to more than a quarter of a million dollars today.
Notice that, even during the early recovery period from the Great Financial Crisis that started in 2009, Apple stock performed generally better than banks.
The Takeaways
It is tempting to bet on banks after their market value has dropped collectively by 40% from the peak. If buying this dip, risk conscious investors might be better off sticking to high-quality and diversification.
But if history serves as a guide, Apple stock may continue to outperform, even if or when bank stocks begin to recover – as was the case in 2009 and the few years that followed. I continue to find AAPL one of the most robust names to hold in a stock portfolio.