Gyroscopic Investing

What happens to Apple if we are at the beginning of a market correction or downturn?

I bought some this morning at $395.99.

I like the 2.68% dividend mostly and the likelihood of it increasing over time based on Apple's hoard of cash.

Apple has created an ecosystem that people are likely to stay within, which creates a nice durable competitive advantage.  Between itunes, the app infrastructure and the cross-device synching capability I think that once a person enters the Apple world they are likely to stay there.  That's JMHO, of course.

Reub wrote: What happens to Apple if we are at the beginning of a market correction or downturn?

Apple is likely at the leading edge of a downturn that has already started.  I think that Apple's 40%+ decline over the last few months, though, is probably most of the decline that it will experience.  Remember that Apple never had a high valuation to start with.  Even with revenue and earnings growing at 50-100%, its P/E never got above 15.

Apple's forward P/E is currently 7.96.  How much cheaper is it going to get than that?  I don't know, but I think that we are closer to the end of the decline than the beginning.  Time will tell.

More power to you MT.  I just can't stomach buying a $400 stock.  Besides, I already own some of AAPL indirectly through my various stock index funds. 

rocketdog wrote: More power to you MT.  I just can't stomach buying a $400 stock.  Besides, I already own some of AAPL indirectly through my various stock index funds.

rocketdog,

A great way to look a stock is to look at its price divided by some other metric. A common example is price divided by earnings.

Let's say I was going to sell you some rice for $400. Wouldn't you want to know how much rice you were going to get? That is why it is important to express things as a ratio such as price/quantity of rice or for a stock price/earnings (or some other business metric). From this lens, you get a lot for you money with Apple shares.

I got curious after my last post as to how much AAPL I actually do own via my index funds.  So I used Morningstar's Portfolio X-ray tool, and it turns out that 1.25% of my equity holdings are in AAPL stock.  That's quite enough for me.  Thanks Morningstar!

melveyr wrote:

rocketdog wrote: More power to you MT.  I just can't stomach buying a $400 stock.  Besides, I already own some of AAPL indirectly through my various stock index funds.

rocketdog,

A great way to look a stock is to look at its price divided by some other metric. A common example is price divided by earnings.

Let's say I was going to sell you some rice for $400. Wouldn't you want to know how much rice you were going to get? That is why it is important to express things as a ratio such as price/quantity of rice or for a stock price/earnings (or some other business metric). From this lens, you get a lot for you money with Apple shares.

I get it, but again I just can't stomach buying a $400 stock regardless of its value, whether real or perceived.  It has a much steeper downside than upside, imho.  With Steve Jobs gone and both Google and Facebook making strong moves into the mobile market, it's going to become more and more difficult for Apple to enjoy the sort of meteoric climb that it's had in the past.  I remember the 1990s when people used to think Microsoft and Yahoo! were sure bets, too. 

Then again, I could also be wrong, but at least I'll sleep better at night.

rocketdog wrote: Then again, I could also be wrong, but at least I'll sleep better at night.

That's what it's all about! 

We should remember that investing is an emotional event. Sometimes the numbers don't mean squat.

Reub wrote: We should remember that investing is an emotional event. Sometimes the numbers don't mean squat.

That's true, but as long as Apple is paying a 2.6% dividend I don't mind if the market only wants to give it a P/E of 7 for a while.

Over time, though, a company like Apple is going to trade at a P/E higher than 7 at some point.  It seems unlikely that it's going to go a lot lower than that, but it certainly could.

Even a dog like Microsoft has a forward P/E of 9.

If Apple had a P/E of 12, which is still very conservative for a company like Apple, its share price would be $125 higher.

All of this doesn't mean much in the short term, but I am confident that the market will see that Apple deserves a higher share price.  There are no guarantees, of course.  It's just a calculated risk.

MediumTex wrote: Apple has created an ecosystem that people are likely to stay within, which creates a nice durable competitive advantage.  Between itunes, the app infrastructure and the cross-device synching capability I think that once a person enters the Apple world they are likely to stay there.  That's JMHO, of course..com

That's generally true. I've been an Apple customer since I bought my first computer in the 1990s.  Back when Dell, HP, Toshiba, and Sony (actually, Microsoft) ruled the world, my Apples allowed me to be more productive. I spent more time producing work than talking to help desks, purging viruses, unlocking the system, trying to find files, the works.

But right now I'm typing this post on Amazon's Kindle Fire. When the time came  to get a tablet, Apple's were either too big (iPad) or too small (iPod Touch), or too expensive relative to competitors.

I don't know what that means for Apple's future.

Remember, forward P/E's are only undervalued when they are under 6.  You cannot compare apples and oranges.

And its still stupid to value a company based on just one year of expected earnings.  There are better ratios to use if you insist on such a heuristic.

I'm generally not a fan of Apple's products (actually it's the stranglehold of control they exert over them that I dislike), but I admire them for what they've accomplished.  Their new challenge is to come up with the "Next Big Thing".  If they think they're still going to be holding on to market share when they're coming out with the "iPhone 43" or "iPad 25", they're going to be left in the dust. 

What's the next big thing?  I dunno, but it will have to be an obvious game-changer, one of those "smack the forehead and wonder why I didn't think of that" products.  Y'know, like the iPod was.  I'll look forward to seeing what it is, even though I'll be unlikely to buy it. 

MachineGhost wrote: Remember, forward P/E's are only undervalued when they are under 6.  You cannot compare apples and oranges.

And its still stupid to value a company based on just one year of expected earnings.  There are better ratios to use if you insist on such a heuristic.

I'm just pointing out that IMHO Apple isn't obviously overvalued, especially compared to some of the other big name technology companies like Amazon with its forward P/E of 72.

rocketdog wrote: What's the next big thing?  I dunno, but it will have to be an obvious game-changer, one of those "smack the forehead and wonder why I didn't think of that" products.  Y'know, like the iPod was.  I'll look forward to seeing what it is, even though I'll be unlikely to buy it. 

Apple iTV.  It's what Jobs wanted before he popped the mortal coil.

Isn't there a watch or something too?

MachineGhost wrote:

rocketdog wrote: What's the next big thing?  I dunno, but it will have to be an obvious game-changer, one of those "smack the forehead and wonder why I didn't think of that" products.  Y'know, like the iPod was.  I'll look forward to seeing what it is, even though I'll be unlikely to buy it. 

Apple iTV.  It's what Jobs wanted before he popped the mortal coil.

Nah -- Roku has already been in that market a long time.  Not revolutionary enough anyway.  It's gotta be one of those, "Holy sh*t -- I didn't know you could do that?!" products.

MachineGhost wrote:

rocketdog wrote: Apple iTV.  It's what Jobs wanted before he popped the mortal coil.

Nah -- Roku has already been in that market a long time.  Not revolutionary enough anyway.  It's gotta be one of those, "Holy sh*t -- I didn't know you could do that?!" products.

Apple's already in the set-top box market anyway with the AppleTV.

MachineGhost wrote: Company X makes widgets, has a 3.7% dividend yield, a payout ratio of 35%, strong prospects for dividend growth, trades at 10 times earnings, nine times forward earnings, 10 times cash flow and one times growth (assuming a 9% growth rate instead of 19%).

Are you interested?

Not if it's $400 a share I'm not. 

And they've lost their innovation advantage. And their competition is getting stronger. And their founder and visionary has passed on. And they no longer seem edgy.

Just sayin....

rocketdog wrote: Not if it's $400 a share I'm not.

Maybe I'm missing something, but what's so important about the absolute share price?  I mean, assuming you can afford at least one.

Strikes me Apple is being priced as if its days of innovation are completely over and that Steve Jobs was the sole innovator at the company. It's likely the latter is somewhat true and we're seeing that in their current lack of new product releases. It's also possible that great ideas are being suppressed by the new conservative management.

Either way, this is just about getting their edge back. And that shouldn't take much more than one great new product release. It's hard for me to believe that the development team at Samsung is suddenly sooo much more innovative and edgy than the team at Apple. Ultimately, everything produced by Apple's competitors is still an improved copycat of Apple's original releases. So if Apple is done innovating, this entire industry may be in trouble.

Xan wrote:

rocketdog wrote: Not if it's $400 a share I'm not.

Maybe I'm missing something, but what's so important about the absolute share price?  I mean, assuming you can afford at least one.

A few reasons...

First, you have more of your money locked up into each share so your money doesn't go as far.  All other things being equal, I would much rather diversify between 10 different well-chosen $40 stocks than put it all into a single $400 stock.  The $400 stock is an "all-or-nothing" bet, whereas there is a decent chance at least some of my $40 stocks will do well enough to overcome any losers. 

Second, with rare exceptions the higher a stock's price climbs the less upside potential there is.  There is just a lot more headwind for a $400 stock than there is for a $40 stock.  It is much more likely for a $40 stock to eventually double or triple in price than it is for a $400 stock to do so (how many $400 stocks can you name that eventually hit $1,200?). 

Third, look at AAPL.  They first hit $400 in Dec. 2011, briefly topped $700 nine months later, then sank back to $400 six months after that.  I'm not eager to jump into an investment that has a strong potential for multiple $300 price swings in little more than a year. 

If I'm going to "swing for the fences", it's going to be with a low-priced start-up company (like AAPL, but back in their early days).  Otherwise I'll stick with my boring index funds, thanks. 

Rocketdog,

That all makes sense, but only #1 has anything to do with the actual share price in absolute terms.  The rest applies regardless.