Category Archives: Investing

Apple – The Best Opportunity Ever?

I did a really silly thing on August 20, 2014-I submitted a price target for Apple Inc. (NASDAQ:AAPL) of 300. The editorial staff at Seeking Alpha, however, did not do a silly thing; they rejected the article. Over the course of the next few days I quickly learned there was nowhere else which was willing to pay me for my trade story and non-metric based price target which called for a 200% increase in the market cap of already the most valuable company in the world. It is funny how sometimes, if you sit still long enough, the world will catch up with you.

I am not the only AAPL Uber-Bull; Carl Icahn thinks that AAPL is “one of the best buys in decades” and has stated he will be raising his own 203 price target. The current consensus street target price is 129.53, a good bit more conservative but more than likely to be inching its way up as AAPL creeps closer and closer to breaking through this level.

Following the blowout reported for Fiscal Q1 2015, which I had joined in with others who were for weeks prior referring to as “the impending highest profit corporate quarter of all time”, it is now worth assessing just what to expect out of AAPL in the next 12 months and beyond.

iPhone 6 and 6+

My own expectations for a record-breaking quarter were based on the pent-up demand I perceived from the previous two launches, the iPhone 4s and the iPhone 5, both of which failed to fully capitalized on what I perceived as “Halo Demand”-what I would describe as the consumer desire for The Best Thing Possible. The 4s disappointed because it was not the 5, and the 5 disappointed because the incremental advancement from the 4s was not game changing. As I and many others had foreseen, the iPhone 6/6+ would represent the snap-back of this rubber-band in demand. Once the 6 was released this was a thing I could see in reality on a daily basis as I walked by an Apple Store and only on a few of the coldest or worst weather days would there not be a line of buyers around the building waiting for the store to open, or, in the evening, to be allowed inside. Matt Lew cites AAPL’s backlog of demand. Jaded Consumer extolls the ability of AAPL to “not only sell scores of millions of smartphones in each quarter, it sells them at a profit unmatched in the field.”

While AAPL CEO Tim Cook promises that the upcoming iWatch will be “The Most Personal Device Ever”, I am completely agnostic of whatever iWatch may do in moving the needle for AAPL. Let us not forget how long Apple TV was supposed to be the next category buster and this has never come to pass. In fact I have for some time cultivated the suspicion that AAPL purposefully uses ruses such as Apple TV and iWatch as a smokescreen to cloud up the moves that are being made in relation to the core device segments.

Risks Ahead?

AAPL bears do exist-I know as I was one as well some years ago. Nolan Bushnell thinks there is some risk for AAPL if they do not soon “continue with some remarkable innovation, then pretty soon their ability to charge premium prices for their products will go away”. Paulo Santos thinks that AAPL may ultimately repeat the mistakes of the Mac/PC wars as smartphones become commoditized and lower-end phones catch-up in terms of capability and capitalize on their much larger user base. This is a theme I can visualize taking place rather well, as I was a kid who had an Apple IIe when IBM-Compatible was taking over the world. My first smartphone was a very cheap android that could do everything I could imagine it doing-after it died after two years of heavy use I replaced it with an iPhone 5c and aside from the normal progression of app design and some of the minor UX differences between the two I did not experience a “Wow, this is what all the fuss is about!” moment. So I can expect for some time that many consumers, both in the US and abroad, will continue to gravitate toward AAPL products do to the aura of Brand, while eventually the gap between functionality will be narrowed, perhaps erased entirely.

One of the strengths that AAPL iPhones enjoy now is the limited number of iOS and Phone version iterations. This makes app design for iOS a much easier thing for designers, as opposed to the 20,000+ combinations of device/OS related to Android. I do not expect this strength to be ceded by AAPL as the closed eco-system-while a weakness in some regards-protects this advantage. This same core developer ecosystem should contribute to AAPL being a leader in the expanding Universe of Things, which is where I expect the next innovation breakthrough to come from rather than a full reinvention of dying analog technologies like television or wristwatches.

Another AAPL bear I follow closely is Westend 511 who believes that Chinese OEMs “are becoming more aggressive in expanding their smartphone footprint and will focus on commoditizing the premium handset segment “, which could prove to be a significant headwind for AAPL investors who rely upon China as a #1 or #2 market. Westend 511 also touts that one of the true strengths of the iPhone lies not in its actual functional supremacy but in the high-bar for defection that many of the core AAPL brand enthusiasts, many early adopters from 2007 onwards, would face in moving to a different platform. As a relatively late adopter myself, as earlier described, I can certainly support this notion as well.

The Intel Handcuff?

Since 2006 AAPL has used Intel (NASDAQ:INTC) chips in Macs and Macbooks. AAPL designs their own chips for iPhone and iPad, and some have thought that AAPL would phase out INTC chips within the next few years. In a recent interview INTC CFO Stacy Smith stated that they are so far ahead of the rest of the industry that it would be a significant step down for AAPL to leave their chip architecture, securing their place with AAPL for the foreseeable future.

Where the titanic struggle in chip architecture is taking place is in mobile between the INTC X86 and the ARM V8-A. INTC lost $4.2billion on mobile in 2014 and could lose even more in 2015. If AAPL or Samsung do release larger tablets as has been rumored this could further encroach on INTC via cannibalization of Macbook and other laptops. AAPL’s recent success stands as a testament to the development of the A7, A8 and A8X chips. Samsung may be introducing a new 14nm chip series in the S6 due this spring, which would be a further nightmare for INTC in mobile. Mark Hibben thinks that Samsung may have to devote 14nm for AAPL, which would lead to further erosion of the competitive balance between Samsung and AAPL in AAPL’s favor.

Metric Analysis

As I fully expected, the Q1 results had a drastic effect on the metrics as I had measured them back in December to the positive-gains in the DCFx/DCFi and the IVC were across the board. The PEG ratio improved from 1.28 to 1.1 while the mPEG held firm at 0.61. The dividend yield decreased slightly due to price appreciation and the consensus analyst score stayed firm at 1.9. The big jumps were most evident in the DCFx (Discounted Cash Flow Value excluding Book Value) increasing to 211.23 from 183.05, the DCFi (DCFV including BV) increasing to 230.72 from 200.57 and the IVC (intrinsic value calculation) jumping to 272.48 from 181.44.

CONCLUSION

While I have but a fraction of the experience that Carl Icahn has under his belt, I cannot find any reason to disagree with his assessment. AAPL makes up a sizeable portion of the S&P500, may one day be added to the DOW, and is a top holding by many of the Mutual Funds where most Americans park their employer sponsored savings plans; AAPL is possibly the most important component of the market, and is close to being thedefacto market. I have no idea how long this trend will continue, nor how messy the divergence may become months or years from now to end it, but this is the case as I see it today.

There are several possible catalysts that are known now which could contribute to AAPL reaching 200 and going comfortably past in the next 12-24 months, some of which are products we have heard of and presumably some we have not yet imagined. One catalyst that could be a boon for shareholders specifically and I have not seen mentioned elsewhere is the very real possibility that Corporate Tax Reform, including an offshore profit amnesty, could very well be coming in the near term. AAPL has the largest foreign cash pile of them all and the ability to repatriate this largess and in part reward shareholders is something I think we can put a relatively high probability on.

As it stands now one of my biggest regrets is previously selling out of most of my AAPL shares, and my second regret is that I must now replace them at this much higher price. Replace them I intend to do, as well, as I would prefer for AAPL to be one of my Top 5 holdings and I expect to make this be the case sometime near April. Any other good opportunities out there right now I will compare them to AAPL until I am considerably overweight AAPL.

Disclosure: The author is long AAPL, INTC, BRK.B.

Herbalife: A Battleground Too Bloody

On April 3, 2012, I made a purchase of Herbalife (NYSE:HLF) amongst my other metric based picks, largely on the strong PEG ratio and dividend yield. I had some faint notion of what sort of business HLF was (GNC but a MLM), but did not think too deeply about it. Certainly I was not myself in the market for weight-gain or weight-loss shakes, nor did I have any desire to dig very deeply into the MLM side of the equation. The very most I thought about it was-“People who join Herbalife to sell products would be better off buying the stock and collecting the dividend, at least that’s guaranteed, as much as such a thing exists”. Ah, what innocent times. Things were good for about a month.

Bill Ackman, until October 2011, was one of those well-enough known guys via CNBC and the like that I had a passing knowledge that he existed, and scant memories of his past escapades with Wendy’s International (NASDAQ:WEN), Target Corporation (NYSE:TGT) and Borders Group. It was then announced that Ackman’s Pershing Square Capital Management had been amassing a stake in Canadian Pacific (NYSE:CP) a stock I owned and soon began the almost weekly proxy voting pamphlets sent by CP and PSCM, which I read with great interest each time they arrived. I gave both sides all the ability to sway my mind based on the facts, but after some time, at least by the turn of the New Year, I was convinced that CP was right and PSCM were vultures trying to, for whatever nefarious reason, install E. Hunter Harrison as CEO of CP (despite there being contractual obligations that would otherwise make this impossible).

Then came Bill Ackman’s announcement of the $1Billion short on Herbalife. I could not help but feel a little persecuted by this guy. What is worse is that I know his arguments make perfect sense, and each new presentation including the most recent I have found myself in agreement with almost every single point and example (unlike CP), and still, I wanted to prevail on my investment and most specifically I wanted him to lose. The worst thing in the world you can do is let emotion rule over an investment decision, and I was knowingly breaking this tenant in my stubbornness with HLF. But so was he.

Later, one of my hero’s, Carl Ichan, jumped into the fray, including fireworks I watched live on CNBC, reinforcing my conviction that no matter how much I agreed that HLF was a MLM, they would beat back the clamor by Ackman and his backers for an investigation by the SEC, or if the investigation came, it would clear HLF of all wrong-doing. They would NOT be going to $0 anytime soon. By being stubborn, and patient, I eventually ended up back in the green on the trade, despite all rational evidence that at any minute the whole thing could come crashing down and Ackman prevail over my chosen side, again. The CP affair did not go as intended when in May 2012 the board of CP resigned just prior to the annual meeting, effectively surrendering to PSCM after more than six months of fighting, just to give in literally on the morning of battle. That my CP holdings have far outstripped my CNI holdings in the same period, with almost all the gains coming after the proxy battle, is of little consequence. I did not care for the way that war had been waged, nor the outcome that felt underhanded and unethical.

Looking at my HLF holdings now, I am still just a little bit more than 8% to the positive, but the breakdown since the beginning of August is worrying. The pop that followed Ackman’s failed “Super-Presentation” was short lived, and if anything the bears stay just as convinced as ever that HLF is in deep trouble. Indeed three separate government probes have been opened, with no specific recent findings having been released. HLF continues to plug along with the normal news items, and even positive things like new product launches and large insider buys are having no effect on the downward drift on the share price.

Final Analysis:

Most of the metrics on HLF look strongly within the range that I look for, with a PEG of 0.70, an analyst mean recommendation score of 1.8, even strong numbers on P/E (10), forward P/E (6.3), Price-to-Sales of 0.82 and Price-to-Forward Cash Flow of 8.65. There is no debt on the books, and the quick ratio of 1.20 and current ratio of 1.60 are encouraging. The dividend has been cut to increase buybacks, which is not ideal to my investing strategy for a few reasons. Ultimately their returns on Assets (18.2%), Equity (285%) and Investment (36.8) are eye-popping, but the Book Price-to-share of -4.69 is a major problem, as is the 2% decline in most recent quarter earnings. The problem specifically in the instance of HLF and the B/Sh is that if there is a risk (and I would say significant headline risk) that some action may be taken by the US government (today, tomorrow, or someday soon), then this would be the number shareholders would be most interested in. The fact it is negative gives no confidence whatsoever. The only two things that keep me interested in HLF, beating Ackman and following Ichan, are not the right reasons to continue following a trade that every indication tells me is wrong. Sell. Sell now. HLF is leaving my Widows & Orphans portfolio, never to return.