Wednesday, June 2, 2010

As With Gold, So With Apple: Too Many Skeptics

Reihan Salam at The Daily Beast has just put out an article in which he says that he really likes Apple's products but is upset about income inequality in America (which has something to do with his point, he believes) and concludes by saying:

Apple won't be able to defy gravity forever. Short it now.

Now I don't know if Mr. Salam is a registered investment adviser; if he is not, he may be better advised to avoid direct instructions of the above sort.

The core point above is correct: nothing defies gravity forever. That was made clear much more persuasively by Marilyn in Diamonds Are a Girl's Best Friend:

"But square cut or pear shaped,
These rocks don't lose their shape . . .

Time rolls on and youth is gone
And you can't straighten up when you bend

But so what? We, and our descendants, are all going to die. So there, Mr. Salam! Neither my point nor yours hits the mark.

The only point is whether AAPL is headed higher (given its lack of dividends). That's all. Social justice go bragh or not, Apple is probably running at an earnings rate of $15/share as I write. (Who knows outside of its top brass?) Earnings the past 5 years have almost doubled yearly. Given the recent accounting change, earnings this fiscal year are going to be more than double that of last year. And Uncle Sam isn't subsidizing its sales.

The only thing I can see is that it's the best I can find of a sorry lot of stocks. The technicals and fundamentals are in gear. The iPad is white hot.

Maybe one shouldn't own AAPL. If Mr. Jobs has a health issue, look out below. And the stock market is rolling over. But there's one in every crowd. In bull markets, perhaps 10% of stocks go down. And except for catastrophes such as in late 2008, some stocks go up in bears. To pay interest to a broker to borrow money to sell AAPL while it's in a historic growth phase while the rest of the consumer electronics sector struggles is extreme.

Right now, there's only one commodity with solid fundamentals and technicals I know. That's gold, of course, because it is not a commodity but a store of value that mostly does NOT get consumed as commodities do.

And amongst companies that make things, without getting into small-company world or very high P/E equities such as Intuitive Surgical, the equivalent of gold is AAPL. The stock is around $260. I have no way of guessing how much market share the iMac family is gaining, but soon enough we may be at or at least looking at $20/share of cash flow, and the "Value Line" for intrinsic fair value is now at 22X cash flow. Do the math.

Hint: Value Line's 2014 price target for AAPL was about $440, but that was before the blowout March quarter earnings were reported and before the iPad was on the market more than a week or so.

Short the stock? Huh?

Copyright (C) Long Lake LLC 2010

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