Several weeks ago I wrote about buying Apple (AAPL) after the stock suffered a fifteen percent price plunge due to concerns over slowing Chinese growth. Primarily I disagreed with the market because it was significantly undervalued and it was just too cheap to ignore, so I began buying.
I had received many emails and comments regarding this call which suggested I was on the wrong side of the trade and Apple would fall all the way below $80 due to the ‘downward trend’ at the time.
In hindsight, at least in the short term, this looks like it was a good call to pick up Apple when others were panicking.
Could it drop to $80? I have no idea, but if it did, I assure you I will be accumulating more.
Has my position on Apple changed since? No.
As long term investors and swing traders, these are the opportunities we patiently wait for, unless of course you truly believe that Apple will be all downhill from here.
Of course since then, it has been revealed that Warren Buffett has taken a $1B position in Apple. To be exact, it wasn’t Buffett himself who made the call but one of his investment lieutenants, Todd Combs or Ted Weschler. Also an investment of that size still represents less than 1% of Berkshire’s entire portfolio.
I would not be surprised when the next 13F report reveals further purchases as Apple kept falling during April and May while that $1B purchase was made during the first quarter.
Let’s review again why Apple was and still is a long term investment buy on my radar.
As for a short term trade, perhaps not as it has had a temporary run-up and the risk-reward is no longer there.
Please note, I am both a long-term deep value investor as well as a medium-term trader who utilizes the combination of both fundamental, technical and macro analysis to form a view of every investment I make. Doing so I believe leads to low risk and superior market beating returns over the long run.
Fundamental Factors;
The Bad
Apple has recorded lower than expected earnings for the second quarter and its first ever quarterly revenue decline in thirteen years.
There is concern in the market whether Apple has outgrown itself and the best days are now behind it after the release of iPhone 6 last year. It would be a tough ask for iPhone 7 to replicate the success of iPhone 6, when it is released later this year.
There is also the challenge of continued declining Chinese demand and the recent banning of certain applications such as Apple Movies (iTunes) and Apple Books (iBooks) within greater China.
A weaker earnings growth has been forecasted but importantly this has been priced into the current stock price.
The Good
Intrinsic valuation of $130-$140 (approx.), so AAPL is well undervalued after the recent price drop and there is a significant margin of safety.
Earnings per share (EPS) have been good for the past 5 years.
Return on Equity (ROE) of over 35% is excellent and forecast to remain stable. There are not many companies who have been able to sustain over 30%pa every year for the past 7 years.
Long-term cash flow relative to reported profits is strong.
Apple has a long term funding surplus.
There seems to be a total disregard of other emerging Apple products and services like Apple Watch and Apple Pay which will become much bigger earning segments over time.
Technical Factors;
The Bad
Still currently below both 50 and 200 day moving averages, although now above 20 day.
The Good
There seems to be very strong price support at the $90-$95 levels, with many smart money managers coming in to accumulate their positions in Apple at these levels.
Other Factors
For longer-term investments, I generally like to see who else is on-board with me and where the smart money has found its home.
In my opinion, actions always speak louder than words. Apple is one of the most widely held stocks by smart money.
With the exit of Carl Icahn, in came Berkshire Hathaway and a myriad of others buying more Apple for their portfolios.
David Einhorn – 15.18% of portfolio managed (increased holding by over 30% shares last quarter)
Zeke Ashton – 10.52% of portfolio managed (increased holding by over 16% shares last quarter)
David Rolfe – 9.83% of portfolio managed (increased holding by over 2% shares last quarter)
Chase Coleman – 8.89% of portfolio managed
Warren Buffett – 0.83% of portfolio managed (new position of 9.8M shares)
Conclusion
For long term investors with a bit of patience, Apple is still well undervalued with a huge margin of safety at current prices.
It is a fundamentally strong company with incredible market loyalty and wide smart money support, not to mention its cash hoard of $215B.
Remember to always ‘Be greedy when others are fearful and fearful when others are greedy’.
This mantra has served me well over the years (as it will for you) and allowed me to buy more Apple cheaply when others ran the opposite way before the recent reversal.
