Why Kevin O'Leary Sold Apple; Nike Goes Swish With New Capital-Return Plans
iStock
Stocks are setting up for one of the best weeks of 2015, with the S&P 500 ETF (SPY) - Get Report up roughly 3.5% over the past five trading sessions. Leading the way higher on Friday is Nike (NKE) - Get Report , which is up 4.5% on the day after announcing a new $12 billion share repurchase plan, 2-for-1 stock split and a 14% increase to its dividend.
On CNBC's "Fast Money Halftime" show, Kevin O'Leary, co-founder of O'Leary Funds and an investor on the "Shark Tank" TV show, said Nike's announcement is helping lift the retail sector out of the doldrums. However, given Nike's "fantastic" return on cash flow, he argued that the company should have considered raising its dividend more, as opposed to rolling out such a large buyback plan.
Earnings results from Macy's (M) - Get Report and Nordstrom (JWN) - Get Report had investors concerned, O'Leary said, adding that the thinking was, "it's over, the consumer is dead." More and more positives are starting to emerge, though.
Positive reactions to Ross Stores (ROST) - Get Report , Foot Locker (FL) - Get Report and Abercrombie & Fitch (ANF) - Get Report are all helping to give the retail sector a boost. Josh Brown, CEO and co-founder of Ritholtz Wealth Management, said investors should avoid Abercrombie for now, with resistance looming at $25.
Although investors are growing more optimistic about the retail sector, he urged caution about going out and simply buying the SPDR S&P Retail ETF (XRT) - Get Report . There are good themes and bad themes; not all stocks are created equal in this group.
Kate Moore, chief investment strategist at JPMorgan Private Bank, says she is "constructive" on consumer discretionary. Money isn't just going into apparel, but electronics, media and vacations as well. "In that sense we've seen the consumer be pretty strong this year and we'd expect it to be strong in 2016 as we get a little bit of wage inflation," she explained.
Even with a rate hike next month, Moore said she expects interest rates in general, to stay low. Not just here in the U.S., but globally. Financial companies, if they raise their dividends, should also see an increase in ownership of the stocks.
The notion of higher rates has forced O'Leary to reconsider some of his stock positions. He's interested in companies that are growing their dividend payouts and generating more cash, as the competition against rising-yield, risk-free bonds is likely to increase. As a result, stocks become less attractive, which is why utility and REIT stocks have fallen.
He likes stocks in health care, consumer discretionary and even industrial sectors, and doesn't have as much exposure to tech as many might assume. But he did make one big move: He sold out of Apple (AAPL) - Get Report and doubled his stake in Microsoft (MSFT) - Get Report .
O'Leary explained that shares of Apple have been too volatile, while margins have been pressured. And although the company has only taken on debt in order to avoid repatriating its massive cash pile from overseas, O'Leary says, "debt is debt," and he does not like the balance sheet in the way that he once did. Apple is also becoming more of a consumer products story, due to its high dependency on iPhone sales, another turnoff for the Shark.
Microsoft is attractive because it's growing its market share and cash flow, and has catalysts going forward as its products are being well-received, O'Leary said.
Ritholtz' Brown pointed out that Apple is the cheaper of the two stocks when it comes to valuation, but investors are clearly voting that Microsoft is the more attractive option right now. He too thinks Microsoft is a buy.
Intel (INTC) - Get Report , is on the rise Friday, climbing 1% after Alex Gauna, managing director and senior analyst at JMP Securities, upgraded the stock to outperform and assigned a $45 price target.
Gauna explained that recent checks on the company have shown positive results and that its exposure to the cloud should help drive revenue. Data-center chips will also show growth, as the company lowers its dependency on PCs, and has the ability to increase gross margins in 2016.
This article is commentary by an independent contributor.