Apple (AAPL) continues to be a holding in the portfolios of our Best Ideas Newsletter and Dividend Growth Newsletter. Since we added the firm to our actively-managed portfolios, its Valuentum Buying Index rating has hovered between a 3 and an 8 (the equivalent of a ‘consider hold’ rating), and we have been quite pleased with the informative nature of the index. In what is typical of the Valuentum process, we add firms to our actively-managed portfolios when they register a 9 or 10 (the equivalent of a ‘consider buy’ rating) on the Valuentum Buying Index and hold them until they register a 1 or 2 (the equivalent of a ‘consider sell’ rating).
However, just like a value investor doesn’t add all undervalued firms to its portfolio, we don’t add all firms that register a 9 or 10 to our actively-managed portfolios. Only firms that our analyst team considers to be the ‘best of the best’ ideas out of the 9 and 10 rating buckets are added to the Best Ideas portfolio and Dividend Growth portfolio. As we seek to capture the entire equity pricing cycle from a 9 or 10 to a 1 or 2, that’s why our best ideas at any time are always the ones included in our actively-managed portfolios. At the time of this writing, Apple is trading at nearly $570 per share, up significantly for the July 24 price of our most recent email transaction alert.
The news keeps getting better for Apple shareholders. In what we believe would be a significantly value-creating move (see: Financial Analysis 101: Understanding Share Buybacks), activist investor Carl Icahn indicated Wednesday that he has made a precatory proposal to call for a vote to increase the company’s buyback program. We continue to believe Apple is worth north of $600 per share, and any buybacks completed under that level would be significantly value-creating. Apple CEO Tim Cook seems open to the idea – otherwise, he wouldn’t have given Icahn the time of day – but it may be a better capital-allocation strategy altogether if the firm waits until shares inevitably face pressure again. This may be why Icahn is asking for at least $50 billion (as opposed to $150 billion previously)—a prudent move, as shares of Apple have rallied considerably since the stock bottomed under $400 per share earlier this year.
The capital-allocation news preceded an announcement Thursday that Apple and China Mobile (CHL) have inked (or are about to ink) an iPhone deal. China Mobile is the largest mobile operator in China by users, with more than 700 million subscribers. The Wall Street Journal noted that the rollout of iPhones is expected to begin shortly before Christmas. We like the news as it opens up Apple to a huge demand source; even a modest adoption rate (a low-single-digit percentage the most likely) could boost earnings per share and cash flow at Apple materially. More importantly, we think the incremental market will make the unit demand prospects for new products even more robust. Apple continues to execute well.
Valuentum’s Take
The Valuentum Buying Index continues to be an informative system to help with investment decision-making decisions. Though shares of Apple have had a lumpy ride this year, the Valuentum Buying Index has helped maximize return on shares, pin-pointing timely points to add to the position in the Best Ideas portfolio and initiate a position in the Dividend Growth portfolio. We don’t intend to increase our full weighting in Apple as a result of these positive developments, however.