About Apple

August 25,2015

Apple offers a very clear illustration of the difference between ” specific risk + market risk“…AAPL versus plain “ market risk “… SPY.

They say almost everyone who invests owns AAPL one way or another, either  directly or through a 401K plan or whatever. Spy is almost 4% AAPL. You can count me in AAPL  both  via SPY, and direct share ownership .

Until last week I was asking myself  why I didn’t invest even more in AAPL.  It didn’t take long for the answer to arrive!

The AAPL picture compared to other growth stocks is very compelling.  A PE Ratio of +/- 10, wonderful !…  Price / Earnings to projected growth ( PEG….0.82 ), wonderful !….Free Cash Flow Yield 12.987% versus 2% for the 10 year Treasury, wonderful !….Return on Assets 20.5%, wonderful! ….lots of cash for possible dividend increases, debt pay down and stock repurchases, great !

The problem arises when you consider that all these numbers are based on the past.  But, ” Mr Market”  is more like a sales manager… interested only  in tomorrow’s result.  That’s where the trading price arrives from.  Differing opinions about the future. .  Who is right ?  Who has an edge ?. The risk  is that your opinion about APPL’s future may be incorrect.

In moving from past absolutes to future estimates ….

Q. Just how dependent is AAPL  iPhone sales on China’s growth ?

Q. Taking it one step further, just how dependable is China’s stewardship of its own economy ? Will there be sufficient buyers to meet Apple’s  China and southeast Asia sales and margin  estimates ?

Q What about the emergence of the Chinese smart phone manufacturer XIAOMI, which has announced the introduction of its smart phone to 10 new countries this fall. It has been reported Xiaomi’s Mi3 is almost 60% cheaper than the iPhone 5C …and better,  with a larger, sharper screen and a camera with higher density pixels.  Plus, Xiaomi’s pricing policy promises to be very aggressive in the emerging markets it has targeted.

Just considering the above, how do you think these factors could impact Apple’s numbers going forward.?…Still wonderful ?

The answer, for me,  is to give Apple the respect it deserves by owning some, and then, calculate at what price I want to acquire many more shares.

For me, it means that however much I want to own AAPL, its best to let it come to me and offer me a pitch I can swing at.  It means I should never let AAPL  account for more than 5% of my investment funds  and that I should buy it with a ” margin of safety ” in mind.  For instance, Morningstar says buy AAPL at $80 per share which is 20% off its Fair Value estimate and almost 30  % below this morning’s opening price of $111.07.  After yesterday, I’m not that confident this is impossible!

I am not strong on patience, so I’ll probably own 25 shares just to feel I am not being left behind !

SPY is also priced looking forward, but when you buy SPY you are buying the USA.  Its much easier to own SPY because SPY ‘s future is much easier to predict and the risk is not as compounded by facts you don’t know, you didn’t know.

At present, the yield of the 10 year Treasury is 2.09%.  The forward earnings yield of SPY is 7% ( 1 year out ). Which would you rather own ?

Richard Maurice Gore

 

 

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