|Forbes.com, Spring, 2013. This article was written with Oliver Pursche, the Co-Portfolio Manager of GMG Defense Beta Fund. It was part of a series of articles developed under an agreement with forbes.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site, forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.|
The day after releasing earnings, Apple shares behaved as I thought and feared they might—disorderly and confused. It is clear, even to the casual observer that Apple is now trading on investor and speculators’ emotions rather than the companies’ fundamentals.
Since trading above $700 per share last fall, Apple has fallen out of favor with investors and strategists alike.
A slow-down of earnings growth and margin compression have been expected for well over a year. Yet, the same analysts that were stepping over each other to come up with the highest price target for the stock, are now piling on the criticism.
At $700, Apple shares were clearly ahead of themselves (gotta love hindsight). But, at $400, with record revenues, the largest share buyback program ever announced ($100 billion) and a dividend hike, investors should be flocking to the stock—yet, they aren’t. Quite frankly, it appears that no one knows what to do with this stock.
Allow me to cut through the clutter: I believe Apple will reward investors handsomely over the next 3 to 5 years.
There’s a school of thought called behavioral finance that offers that, because they are comprised of humans with thoughts, feelings and emotions, markets contain abundant inefficiencies, and that recognizing these inefficiencies can offer up opportunities.
For instance, behavioral finance disciples refuse to meet with company management teams. Reason: face to face meetings create relationships that can cloud judgment. The portfolio manager may end up hating or loving the guy or girl and suddenly long and short decisions are based on notions of support or destruction of the CEO.
I’m not sure what the behavioralists would say about Apple, but there’s definitely something going on. To wit, wearing my investment advisor hat, what if I told you I wanted you to buy shares in a company as follows:
The most profitable company in the United States.
Trading at a discount to the S&P 500 (14.0x versus 9.2x)
With a higher dividend yield than the S&P 500 (2.7% versus 2.03%—and being raised to above 3% after the dividend hike announcement)
Growing faster than the consensus forecast for the S&P 500
And, cash sitting on the books that represents 38% of the share price.
If you were looking for long term growth would you buy this stock? Likely.
Be honest, if I then told you it was Apple, would you still buy it? As far as I can tell, approximately half of all investors wouldn’t. Why? Because it’s Apple. And that my friends, is the issue. But since it’s the only one there is, and it doesn’t constitute a reason, really, for the rest of us, there’s a tremendous opportunity.
Disclosure: Apple is a holding in MPDAX for which I am the co-manager. In addition, AAPL is held in separate accounts at my firm, Gary Goldberg Financial Services.