One of Wall Street’s favorite pastimes these days is trying to figure out what Apple’s (AAPL) “next big thing” will be. Or more importantly, if there will even be a next big thing.
That’s remarkable when you consider that just seven years ago Apple came out with its first iPhone, which the company doesn’t even support anymore. From the next big thing to obsolete in seven years. Yes, they’ve come out with newer versions and the rumor mill is abuzz over the iPhone 6 (and whether it will have a larger screen), but the “wow” factor has decreased. Frankly, I’m not interested.
Oh, I like and use Apple’s products, and it’s a great company, but everybody knows that. Investors can debate until they’re blue in the face whether AAPL is undervalued by 10%, 20% or more, but not me. I want to buy a stock for pennies on the dollar, which isn’t going to happen with AAPL, because it gives you more upside potential with low downside risk.
I don’t see AAPL doubling my money the way I sometimes can when buying for pennies on the dollar. As a contemporary value investor, I look for what are called “asymmetric” opportunities, a fancy way of saying I risk $1 to make $2, $3, $4 or more.
Many times these are under-the-radar companies like Genworth Financial (GNW), which earned me a 177% gain, or V.F. Corporation (VFC), a 118% winner. Sometimes they’re well-known companies, like 90% profits in Bank of America (BAC).
Sure, I’ve had a few losses over the past two years, but the average size of each loss was just 8.02%. If you’re buying for pennies on the dollar – on “clearance” if you will – then the price usually can’t go much lower. In the end, our winners earn us far more than our losers cost us, so we ultimately come out way ahead.
Take, for example, a company like Post Holdings (POST). Yep, the cereal company that has been making Grape-Nuts and Post Toasties corn flakes for more than 100 years. Now that’s what I call a competitive durable advantage.
Because Post’s products aren’t likely to become obsolete, it just might be a better business and investment than Apple. I can see doubling my money in POST, which means a $2 billion market capitalization will grow to $4 billion. Apple, on the other hand, would have to become a monstrous $960 billion company to double my money. The law of large numbers works against that.
The problem is that value can be fleeting in companies where the product cycle is short. Not convinced? Check the obituary column for 20th Century deceased technology companies: Polaroid, Eastman Kodak, Palm, Napster, Commodore International…and we could keep going. I would much rather invest in businesses with predictable, sustainable cash flows. Imagine if Warren Buffet had bought any of these obsolete companies instead of Coca-Cola (KO), Geico or See’s Candies. He would not be as rich as he is now.
A company like Post makes products that not only have longevity and significant barriers to entry, but they also provide the strong cash flow that allows the company to expand, as Post has done recently through strategic acquisitions into faster-growth areas. Post is also a recent spinoff from Ralcorp (RAH), and spinoffs are frequently good opportunities.
As a contemporary value investor, I look for undervalued, low-risk investments with excellent upside potential. I’ve described it as being like the old “Heads I win, tails you lose” coin-flip game. In our case, it’s more like “Heads I win, tails I lose nothing – or at least very little.” Or playing blackjack at a casino and being allowed to keep your winnings but not having to pay up when you lose. Who wouldn’t take those odds?
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