Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How a High Conviction Bet on Apple Beat the Megacap Selloff
Transcript
- Lucas: So, the S&P 500 is sitting at 7,483, up almost two percent in the last five days, and the Nasdaq is up over two percent too. But look under the hood — Apple has surged eight point eight percent in that same stretch, while NVIDIA is up just one point two percent and Tesla three point six. The gap is striking. Luna: Eight point eight percent in five days — that's not just a bounce. What's driving Apple specifically while the rest of megacap tech is more mixed? Lucas: A few things. First, Apple's cash flow generation is absurd. They're sitting on a cash pile that, even after net debt, gives them enormous flexibility. But the real story is buybacks. Apple has been aggressively reducing its share count — over the last decade, they've bought back more than six hundred billion dollars worth of stock. That math compounds powerfully. Luna: Right, so fewer shares outstanding means earnings per share go up even if net income is flat. But the market seemed to reward that this week more than usual. Any catalyst? Lucas: I think it's a sentiment shift. The megacap selloff we saw earlier this year — especially in May and June — left some of these names undervalued relative to their cash flows. Apple's price to earnings ratio came down to around 28, which for a company with their moat and services growth is actually reasonable. And investors are starting to rotate back into quality. Luna: Services growth is key. Apple's services revenue — iCloud, Apple Music, the App Store — now accounts for over twenty percent of total revenue and has much higher margins than hardware. That shifts the whole earnings profile. Lucas: Exactly. And that's where the pricing power argument comes in. Apple can raise iCloud prices or take a bigger cut from in-app purchases because customers are locked into the ecosystem. That's a recurring revenue stream that grows with the installed base, not with unit sales of iPhones. Luna: So for a concentrated portfolio — which is what this show is about — Apple checks a lot of boxes. Strong cash flow, pricing power, buybacks, and a services tailwind. But how do you size it? If you put too much in one stock, you take on single-name risk. Lucas: That's the million-dollar question. In a concentrated portfolio, you might hold ten to twenty stocks. If you love Apple, maybe it's ten or even fifteen percent of your portfolio. That's double its weight in the S&P 500, which is about seven percent. But you have to be willing to ride out the volatility. Luna: And that volatility can be brutal. Apple dropped fifteen percent between April and June this year before this bounce. If you had fifteen percent of your portfolio in Apple, you were down over two percent just from that one position. Lucas: Right. But the flip side is that if your thesis is right, the upside is outsized. And the key is to have a thesis that's grounded in fundamental drivers — not just momentum. For Apple, the driver is the services transformation and the buyback machine. Those are durable. Luna: Let's talk about the buyback machine for a second. Apple has been buying back roughly ninety billion dollars a year. At current prices, that's about three percent of the company's market cap annually. So even if earnings don't grow, EPS grows three percent a year just from buybacks. Lucas: And that's a huge tailwind that many investors underestimate. In a concentrated portfolio, you want companies that have that kind of self-help. It's like a hidden dividend. And Apple's buybacks are accelerating — they borrowed money at low rates to fund them when rates were near zero, and now they're using the cash flow to pay down that debt. Luna: So the balance sheet gets stronger over time. I want to zoom out though — we're talking about Apple, but the principle applies to any stock in a concentrated portfolio. What's your framework for deciding which stocks earn that high-conviction spot? Lucas: Three things. One: sustainable competitive advantage — a real moat. Two: strong free cash flow generation, ideally with a high free cash flow yield. Three: a management team that allocates capital wisely — buying back stock when it's cheap, investing in growth when returns are high, and not overpaying for acquisitions. Luna: And for Apple, all three are in place. The moat is the ecosystem. The free cash flow yield is around three and a half percent. And management has been stellar on capital allocation. Lucas: So the episode today is really about using Apple as a case study for how to think about concentration. If you're building a ten-stock portfolio, Apple is the kind of name you want at the core. But you need to have the conviction to hold through the drawdowns. Luna: And the discipline to rebalance. If Apple doubles and becomes thirty percent of your portfolio, you have to trim — not because you don't love it anymore, but because risk management demands it. Lucas: Absolutely. That's the difference between conviction and complacency. A concentrated portfolio requires active monitoring, not just buy and forget. Luna: Speaking of active monitoring — if today's deep dive into Apple and portfolio construction was useful to you, this is how the show stays ad-free and independent. We don't run commercials, and that's intentional. If you want to support the work, you can buy us a coffee at buy me a coffee dot com slash fexingo. No pressure, just a way to keep the content open for everyone. Lucas: Yeah, that's a nice way to put it. It's a small gesture that goes a long way in keeping this podcast sustainable. And we really appreciate those who do. Luna: Alright, back to the markets. So Apple's surge this week — is it a buying opportunity now, or has the easy money been made? Lucas: I think it's still a reasonable entry, but I wouldn't chase. The stock is up almost nine percent in five days, so you might get a pullback. But if you're a long-term investor building a concentrated portfolio, waiting for a three to five percent dip is fine. The thesis doesn't change in a week. Luna: And what about the broader market context? The S&P 500 at 7,483 is near all-time highs. Are we in a bubble, or is this earnings-driven? Lucas: I'd say it's a two-tier market. The megacap tech names — Apple, Microsoft, Alphabet, Amazon, Meta — they have the earnings to justify the valuations. Microsoft's price to earnings is 33, but its cloud growth is still strong. Alphabet is at 27 times earnings with a ton of cash. But if you look at the small-cap Russell 2000, it's actually down half a percent over the last five days. The breadth is narrow. Luna: Which is exactly the environment where concentrated stock picking shines. You don't need to own the whole market; you just need to own the best businesses. Lucas: Right. And the best businesses right now are the ones with pricing power, strong balance sheets, and the ability to generate cash in any environment. Apple, Microsoft, Alphabet — they all fit. But the key is to do your own research and not just buy the names everyone talks about. Luna: So if a listener wants to start building a concentrated portfolio, where should they begin? One stock at a time? Lucas: Start with one or two names you understand deeply. Read the annual reports, listen to the earnings calls, model out the cash flows. Then add positions gradually. Don't try to build a ten-stock portfolio overnight. It takes time to develop conviction. Luna: And that's the real edge of active investing. Time and effort spent on deep research. Apple's 8.8 percent week is just a reminder that when you're right on a high-conviction name, the payoff can be substantial. Lucas: For sure. And we'll keep digging into individual names and portfolio strategies on future episodes. Thanks for listening.