There is nothing more dangerous than an “obvious” investment. Markets being what they are, by the time an investment “obviously” looks good, most of the good news is already priced in … and any whiff of less-than-perfect news can be enough to send the share price tumbling.
I really believe that. So I’m choosing the words I’m about to say very carefully: At current prices, Apple Inc. (AAPL) is quite possibly the most obvious buy I’ve ever seen in my lifetime.
The Apple stock price is so cheap right now, it is actually ridiculous … as in stark-raving mad lunatic ridiculous. Were Apple CEO Tim Cook to actually wear clown makeup and juggle bowling pins while riding a unicycle during the next conference call, the pricing of Apple stock would be no more ridiculous than it is right now.
I know, I know. I just finished telling you that “obvious” investments rarely seem to work out as planned. But it seems that while I am focusing on the obvious cheapness of Apple stock at today’s prices, Mr. Market is fixated on the obvious slowing in iPhone sales.
AAPL Stock Showing Weakness
Yes, iPhone sales are slowing. We all knew this day would come, particularly after the iPhone 6 windfall. But the market was pricing AAPL as a no-growth company even before the recent collapse in the share price. Let’s play with the numbers a little.
Apple stock trades for 10 times earnings. Stripping out the cash, which accounts for more than 40% of AAPL’s market cap, you get a P/E ratio in the mid-single digits.
Yes, yes. I realize that most of that cash is offshore. So let’s chop its value in half. You’re still looking at a company with a P/E ratio in the high-single digits.
Now, a low valuation by itself doesn’t really mean much. Plenty of companies are cheap for a reason, and slower-growth companies should command a lower multiple.
Well, let’s see how it stacks up:
|Procter & Gamble
No offense to Procter & Gamble or Kimberly-Clark. Both companies have made a lot of money for their investors over the years. But does it really make sense to pay 27.2 or 46.2 times earnings — or 3 or 2.5 times sales — when Apple trades for 10.1 times earnings and 2.3 times sales?
Again, valuation multiples aren’t everything. Let’s also take a look at profitability as measured by return on equity:
Apple’s return on equity has consistently bounced around between 30% and 40% over the past decade. Procter & Gamble and Kimberly-Clark have struggled to do even half as well.
Now, I realize it’s ridiculous to compare Apple to consumer staples stocks like these. But then, it’s also ridiculous that Apple trades at current prices.
Bottom Line for AAPL Stock
Don’t just take my word for it. Some of the smartest gentlemen in the business have made Apple a ridiculously large piece of their long portfolios. Both Carl Icahn and David Einhorn have 21% of their respective long portfolios invested in Apple stock. David Tepper and Julian Robertson’s Tiger Management both have large, outsized positions as well.
Hey, these guys aren’t perfect, and anyone can make a bad investment call. I myself do it often enough.
But I would trust the judgment of these gentlemen over the panicked hand-wringing of Mr. Market any day.
As of this writing, Charles Sizemore was long AAPL stock.