Is it time to take a bite out of Apple?

apple dmmDear Mr. Market:

For years the world has had a love affair with Apple (AAPL). It has become an amazing company delivering mind-boggling performance to its shareholders while creating a loyal following with its consumers. Over the last 10 years it has rewarded its investors with returns over 1,400%! As volatility has returned to the markets many are asking if this ship has sailed and whether Apple will become another technology stock of the past, replaced by the new ‘tech darlings’ of today. In our opinion… this statement couldn’t be any further from the truth. We feel that the market is presenting investors with a rare buying opportunity in a phenomenal company that is positioned to remain an industry leader for years to come.

Why is it that people want to buy a stock as it breaks all-time highs? It’s like going into your favorite retail store only on days when they announce that they have marked up all the items you wish to buy. If you were tempted to “take a bite out of the Apple” as the stock approached $140, why wouldn’t you want to buy that same company for almost $30 less per share? Did something change dramatically with the company, their management, or the competition?

Cash/Balance Sheet

According to recent reports Apple holds over $200 billion in cash! They have enough cash on hand to buy every NFL, MLB, NBA and NHL team and still have money left on their balance sheet.   Their stockpile of cash is approximately a third of their market value. Investors should view this as a hedge against declines but also a reserve for future deals, dividends or any other ambitious investments that the company decides to pursue. It won’t happen but Apple could buy all of Walt Disney and still have plenty of money to grow, pay its dividend to shareholders, and even make other acquisitions. These cash reserves give the company incredible flexibility that other corporations can only dream of.

Value

Currently AAPL is trading with a P/E of 13.25, to put this in perspective the S&P 500 is currently at 19.50. When you take into account the cash reserves the P/E drops to approximately 6.5 times forward earnings! Factor in a yield of 1.80% and it is abundantly clear the tremendous value that AAPL presents to investors! In the last two months alone AAPL has traded as high as $132.07 (6/20/15) and as low as $103.12 (8/24/2015) those numbers reflect a correction of over 20%! We’ve discussed before that the textbook definition of a correction is a loss of 10% or more, rarely are investors presented with a buying opportunity in a company like this. Even if this stock market scares you, would you bet that AAPL doubles to around $230 within five years or gets chopped in half down to $58? Think about it… Doesn’t that doubling of price seem more of a reality than say the Dow Jones closing over 32,000 in five years?

Revenue

Last quarter (Q2 2015) Apple announced revenue of nearly $50 billion with quarterly net profits in excess of $10 billion. These numbers are certainly eye openers and force many to question if they can be maintained going forward. Just this week (9/14/15) Apple announced that they have 10 million pre-orders for the new iPhone 6s. What many don’t understand is that Apple still has plenty of growth to penetrate the smart phone market. Currently they have only penetrated 14.6% of the smart phone market globally!

Sector

The world is becoming more connected on a daily basis – dependence on cell phones has changed drastically over the last decade and will only continue to grow. According to research from Statista.com the average U.S. adult ranks their smart phone as being more important on a daily basis than their computer, television and even sex! Current iPhone users have stated that they expect to purchase or upgrade their device every two years! The technology sector has been cursed in the past with stocks that trade at high premiums with few if any profits. Apple has proven that it’s a different type of company and shouldn’t be lumped in with technology names of the “dot com” era.

China

This continues to be the primary negative headwind that is associated with Apple and its future outlook. We would suggest that this has been completely blown out of proportion and while China will have an impact on global markets, the long-term effect should be minimal particularly with a company like AAPL. In their fiscal third quarter Apple announced that sales in China increased by over 110% as the country was also reporting that their economy was slowing. Tim Cook, CEO of Apple, recently announced, “China represents an unprecedented opportunity over the long-term.”

Our outlook…

apple-moneyTo put it simply we feel that Apple presents an attractive value opportunity to investors. This past spring activist investor Carl Icahn wrote an open letter to Apple CEO – Tim Cook, stating his opinion and valuation for the stock. Icahn’s portfolio holds over 20% in AAPL and in the letter he clearly states that he expects Apple to hit $240 per share. While this might look a bit aggressive based on the volatility we have recently experienced, the analyst community also has favorable ratings on the stock. There are currently 50 analysts that have issued an opinion on AAPL; none of them have it rated as a ‘sell’, there is one with an ‘underperform’ rating while the rest are hold (12), buy (21) or strong buy (15). In the past investors have been burned when they chase a technology company dropping in price but Apple is truly a unique situation. As the price has dropped the company is not trading at a huge premium with little to no room for error going forward. Even if Apple posted no growth or profits for the next decade they would be able to maintain their dividend! Our recommendation is to take advantage of the recent selloff and consider adding Apple to your portfolio. If you own it already, you’ve seen this movie before! If you don’t own the stock, buy it on any market dips and tune out the market noise knowing that you just bought one of the best companies in history …while it’s still on sale!

*** Many clients of My Portfolio Guide, LLC currently own Apple (AAPL) stock in their portfolios. This is not an endorsement that everyone should own AAPL – to discuss if it is appropriate for you please contact us.

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