Possibly. But we do think Apple’s stock is cheap.
$727 billion. $727,000,000,000. That’s Apple’s (AAPL) market capitalization as of the close of business February 11. It’s hard to put such a huge number into perspective, but it amounts to roughly the market caps of the next two largest companies on the US market, Exxon Mobil (XOM) and Microsoft (MSFT), combined. From our perspective, Apple is finally getting credit for its sprawling and near-impenetrable ecosystem and dominance in converging technologies from the iPhone to the iPad to wearable devices.
In his latest open letter that’s making headlines, Carl Icahn upped his fair value estimate of Apple to $216 from $203 due in part to higher-than-previously-forecast earnings estimates for the current fiscal year. We don’t think the revision is meaningful, but we do think the gap between Apple’s $125 per share stock price and Icahn’s fair value estimate is worth noting. Remember, investing is not about the precision of the fair value estimate, but instead, it is about identifying significant valuation outliers with a high likelihood of price-to-fair value convergence. That’s Apple. We value shares of the iPhone maker conservatively at $135 each.
The company is one of the largest positions in both the Best Ideas portfolio and Dividend Growth portfolio.
With underpriced ideas becoming more and more difficult to find in today’s market, Apple, trading at just ~11 times current fiscal year earnings (less net cash), the company is an absolute bargain, in our view. For example, shares of consumer staples equities such as Coca-Cola (KO) and Procter & Gamble (PG) are trading at over 20 times current year earnings. The less risky investment idea is Apple, even if the firm operates in the fast-changing world of technology. The market is slowly coming around to this view, and it is growing more likely that 2015 may be one of Apple’s best years of stock performance yet.
We would not be surprised to see Apple become the first $1 trillion market cap company in history. Have you seen the company’s balance sheet lately?
Apple has nearly $180 billion in total cash and short-term investments. For illustrative purposes, with that kind of pocket change, it can buy industrial giant Boeing (BA) and chemical giant DuPont (DD) outright or Merck (MRK) or a basket of financials, including both Goldman Sachs (GS) and Morgan Stanley (MS). The point is that Apple deserves to have a large market capitalization, and putting into perspective what the tech giant could buy with cash just sitting around hits this point home. The company has ~$32 billion in long-term debt on the books.
In other news, the latest addition to the newsletter portfolios, Cisco (CSCO) posted solid calendar fourth quarter results and increased its quarterly dividend by a couple pennies, to $0.21 per share. That’s good for a 10%+ payout jump and a 3%+ annual dividend yield – exactly the type of performance we were looking for. The firm noted that product orders rose 5% on a year-over-year basis in the most-recently reported quarter and that its book-to-bill ratio was north of 1. Management guided the current quarter’s revenue growth to the range of 3%-5% and earnings per share in the range of $0.51-$0.53. Both measures were in line with expectations.
The market is coming around to Cisco’s fantastic dividend growth potential. As with Apple, the company is included in both the Best Ideas portfolio and Dividend Growth portfolio.
I wanted to comment briefly on Baidu (BIDU), a previous holding in the Best Ideas portfolio. We added shares of the Chinese search giant in August 2013 at ~$134 and removed them from the portfolio at $221+ for a nice round-trip gain. It looks like the company will open up aggressively lower tomorrow as a result of a weak first-quarter revenue outlook. Though we remain optimistic on Baidu’s long-term prospects, we currently hold Alibaba (BABA) in the Best Ideas portfolio as our sole exposure to China. We’re not allocating any incremental capital to China at the moment.
In Valuentum news, please have a look at the new format of our ETF reports. The new format is something our team has been working on for a while, and we’re very excited about rolling out the first in the series today. To download the file, please click .