Apple bears are wrong: Here’s why

“With so much written about Apple (AAPL), I am amazed that so few have focused on the most important driver of its stock price: the company 270% return on invested capital (ROIC),” David Trainer writes for Seeking Alpha.

The most common bear arguments for AAPL are:
1. The stock has gone up so much already, it cannot continue
2. It is too large a holding in indices and funds

My responses:
1. Past performance (for stocks, ETFs or mutual funds) is not an analytically sound approach to predicting future performance. I know it is popular, and like most technical analysis, it works great until it suddenly stops working. And it usually stops because more fundamental factors take over. For example, American Airlines (AMR Corp) (AAMRQ) traded with an inverse correlation to oil prices until shortly before it announced it was filing for bankruptcy due to staggering pension liabilities. Long-term trends are best predicted by deep fundamental analysis.
2. Apple deserves to be a large holding. It represents the best of corporate America.

“Apple represents the best of corporate America because of its elite level of profitability,” Trainer writes. “A 270% ROIC means that the company generated, in 2011, $2.70 of economic earnings for every dollar of capital put into the business over its life. In other words, Apple generated enough cash flow to pay off its original investors 2.7 times in one year.”

Trainer writes, “For investors considering buy AAPL now, the stock is cheap and implies astonishingly low profit growth. At $570/share, the current valuation suggests that Apple will grow its NOPAT by only 10% In fiscal year 2012. Consensus for EPS growth is over 60% this year (2012) and around 15% for 2013. If Apple grows its NOPAT by 15%, compounded annually, for 3 years, the stock is worth north of $700… I recommend investors buy and hold the stock because of its extraordinary profitability and cheap valuation.”

Read more in the full article here.

17 Comments

  1. At least this person gets it. Apple should already be at $700 for what it’s last earnings have shown. Factor in it’s future earnings and $1000 is even cheap.
    Why on earth would anyone invest in FB for the long term is beyond comprehension. Even short term is a loosing proposition.

      1. +!00

        But, then again, I’ve given up on trying to help people understand the difference between its and it’s, bring and take, imply and infer, affect and effect, left and right (!), and the like.

        Thanks for your efforts.

  2. Anyone holding Apple right now is foolish. It has lost almost 20% of its value since its earnings report two weeks ago. Stay on the sidelines until the price stabilizes.

    1. “Anyone holding Apple right now is foolish.”

      Um, would owning 5700 shares of AAPL right now, average price $12.42 each, seem foolish to you? Hmmm, let me find my motley.

      1. That would depend.

        At 640, your 5700 shares had an unrealized value of 3.648M. At the moment, your unrealized value is 3.060M. By choosing to hold, you’ve given back 588k to the market.

        If you’re fine with that, so be it. I wouldn’t be as evidenced by the fact that I closed my long position in AAPL some weeks ago. When I made mention of this fact on MDN, I was labeled a troll by some reader.

        Well. This “troll” bought AAPL 580 PUT options immediately after closing my long position. I have since made a very nice gain on this ride down. And when, if, a volume climax triggers the end of the move down, I will go long AAPL again.

        So. Just as you might disagree with someone who says anyone holding Apple is foolish because his view of the market doesn’t coincide with yours, I could easily say someone who is willing to give back 588k to the market, only to have to make it up again is foolish… but I won’t.

        That’s your decision to make based on your beliefs and trading/investment style, not mine.

        It would be nice people around here would ease up a little when it comes to discussing investing/trading AAPL. I’m far from a troll, and I’m sure 99.99% of the people who come to MDN aren’t trolls either. I just wish people could check their ego at the login screen.

  3. While those in the know or those from the financial industry talk about the positives and to hold or buy during this blip, I ask what about the unknowns that continually brings down the market? I’m thinking along the lines of Greece, Europe, Double Dip Recession there, Obama re-elected, etc. Can obstacles such as these be a threat or just overblown hype? Apple has already lost over $100.00 from it’s highs AND it wouldn’t be the first stock I owned that crept down but the word on the street was that it will rebound. It will go up to better numbers then before. They never did, and instead severely crashed and that scares me alot. I mean ‘a lot’! (sorry, had to add my pet peeve to the list of cococanuck and Randian).

  4. I’m with tbone. The market is much more than AAPL. If our economy doesn’t turn around, AAPL will capitulate. And those who chose to hold on to AAPL will watch in horror as their unrealized gains dwindle.

  5. @ MDN : But market evangelists declare that the market is always right. It has a self-correcting “invisible hand” that magically repairs human irrational behavior. Don’t you believe that financial markets should be completely free and beholden to no regulation or oversight by the sovereign people?

    Because if you now admit that Wall Street wizards are just out to line their own pockets regardless of what damage it does to companies like Apple and the people who are associated with it, then perhaps you might want to consider some moderation of your repeated extreme right wing market positions.

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