By Kirk Spano
I haven’t been writing much lately, primarily because I have had so much rolling around in my head, I decided to take a break from putting it out there and see what was still around when I started up again.
There was one main idea that stayed with me the past few weeks, and it was that investors would be silly not to buy Apple /zigman2/quotes/202934861/composite AAPL -1.40% at these prices.
First, Apple, even at its mammoth size, is still a growth company. It's not the 50%, 60%, 70% annual revenue growth company it was, but it is still a growth company, somewhere in the teen percentages for the foreseeable future. That's pretty darn good for a big company that pays a dividend.
I ran a very simple screen just to get some perspective. It was set to find companies over $20 billion in market cap with revenue growth rates over 15% the past one and three years. Sixty stocks popped up. So, I added companies that had free cash flow vs. a market cap of at least 5%. That whittled the list down to 14 companies.
Of the companies that made that simple screen, several were Chinese. I dismiss them for one simple reason. I can’t read the financial reports of Chinese companies in the native language.
After dismissing the anomaly of Chinese companies, there were only five companies left. Four American and one Thai. One of the companies that made the screen was a company I mentioned last year, Priceline . Their stock, even after a huge run, kept on running. Why? The company just keeps making money.
Being profoundly profitable is an Apple quality. What is especially important to recognize is that a lot of that profit comes from existing customers. Apple does not need to steal market share in big heaps to maintain profitability. Their income is very much like an annuity stream of income. The customers just keep buying stuff. I know. I get to see my daughter's iTune email receipts every week.
Apple is still gaining new customers, of course, as the world opens up and more people look to improve their quality of life through better communications, functional electronics and more entertainment. Indeed, while we might feel that smartphone penetration is nearly saturated, globally that is not true. About 80% of the people in the world now have a cell phone, but there are only about a billion smart phones in the world, and only half of those can receive high-speed data.
As high-speed data spreads and people can afford the smart phones, users are projected to reach about two billion by 2016. Apple can grind away and take their cut of that growing economic pie. Even if Apple places second to Google, so what? Being second to Microsoft seemed to work out pretty well for Apple.
On top of what we already know about Apple's products, we have as a free bonus, what we do not know about Apple's products. Here, I finally get to talk about what I think Apple is really good at, which is, The Next Big Thing . The next big thing for Apple is of course an unknown, but one of the next big things is a watch. Did you get giddy?
If "a watch" doesn't get you excited, it should. It gets me excited and I am an anti-watch guy. I have worn two watches in my life. One, a Jemis (because I couldn't afford a Swatch and had no fashion sense), I bought in high school during a preppy phase which lasted about four months, and one which a girl friend bought me in college. I had to break up with the girlfriend or keep wearing that watch. I broke up with the girlfriend.
The iWatch, or whatever they decide to call it (I really hope it isn't iWatch. I like The Strudel ... get it, Apple Strudel?), truly interests me. I will get one. My interest is not only as a consumer, though, but also as a marketer and investor. Imagine the cool things that Apple can do with a watch, both technologically and fashionably for those of you who want to be stylin'.
If there is one more thing I know about Apple, it is that they still have some residual cool, even if it's dressed a little more plainly today. The iWatch will change that by bringing back Apple's cool the same way that Justin Timberlake brought back sexy and the way that Fonz said "heyyyyyyy." The Apple watch could absolutely sell a hundred million units over a its first cycle. Do the math on that.
Hedge fund trades, cash and options
Since I mentioned Google above, let's talk about one of the hottest trades from the fourth quarter of 2012. Many hedge funds and traders shorted Apple and went long Google. That was a great trade. And now it is almost over. Those still in the trade are either getting out or will be soon. Last one out, who was probably the last one in, gets the "dang it" award.
Speaking of hedge funds, let's talk about what David Einhorn (fellow Milwaukeean) sees in Apple for a paragraph. Cash. Gobs of it. Right now, that cash is doing very little other than maybe becoming Apple's own sovereign wealth fund. That inactivity is why Einhorn has rattled a few cages lately about getting that money to work or getting it back to shareholders. My suspicion is that Apple does both, finding some business use for the money and paying a bigger dividend. Frankly, I am surprised that Apple didn't pay a very special dividend in 2012 before tax rates went up a bit.
Sticking with the hedge fund thoughts brings me to an option trade that was available with Apple. The January 2015 LEAPs were pretty cheap awhile ago. Now, those contracts are expensive. Why? Because some of the smartest hedge funds know what I know. Apple is about to go on a big run upward in share price.
My analysis says that Apple, which is priced like a value stock, will reach a valuation which more properly identifies it as a slow growth company with huge cash flow. That would mean roughly a double in share price, on top of whatever income they pay out. Over the past few weeks, the idea that stuck with me, became my second largest holding. There is still time for you to add it, too.
Disclosure: Mr. Spano owns shares of Apple.