“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.