Wednesday, September 1, 2010

Gold 'n Apple

The golden apple is an element that appears in various national and ethnic folk legends or fairy tales. Recurring themes depict a hero (e.g., Hercules or Făt-Frumos) retrieving the golden apples hidden or stolen by a monstrous antagonist. Alternatively, they are depicted as divine food and the source of immortality in Norse mythology.

Three golden Apples were featured in Greek mythology, in which a hunter named Atalanta raced against a suitor named Hippomenes who used the golden apples to distract her so that he could win the race . . .

(From Wikipedia)

Gold and Apple. Interesting how they have been linked over the millenia; they form ends of a barbell investing strategy for me at this time.

As an ongoing accumulator of AAPL stock, I am satisfied that it went up with a strong NASDAQ today. I am too old and out-of-it to use any of the stuff that Apple announced today, but it is good to see a blogger have very positive things to say. While not uniform, most reviews I saw on the 'Net were positive as well.

There are other product-related straws in the wind. Re the iPad, it's great to see the offbeat report that a private school in Scotland has shifted instruction entirely to the iPad. I never would have guessed; in fact, I traded out of AAPL stock after a 10% gain ($200 to $220) shortly before the iPad's introduction as I was worried it would be a disappointment. Given the success of this product and of the iPhone 4, along with the decline in interest rates which have made fixed income even less attractive, I am quite satisfied having bought back into the stock at somewhat higher prices.

Perhaps the most underappreciated news of the day is about the iPhone 4 and not today's presentation about the iPod line refreshment, iTV and the like. Worried about how the antenna controversy and/or Android are affecting sales? Here's a great headline for anyone who owns AAPL stock:

Apple unable to keep up with iPhone 4 demand, say execs

The brief article begins:

Apple is still unable to cope with interest in the iPhone 4, two of the company's key executives indicate. A Deutsche Bank analyst, Chris Whitmore, recently met with CFO Peter Oppenheimer and senior VP of retail Ron Johnson to discuss the state of sales. "iPhone 4 demand remains very robust and despite efforts to close the supply-demand imbalance and the continued supply ramp, Apple still cannot meet iPhone demand," Whitmore says of the discussion.

Yours truly is not a financial analyst. Looking at little more than seasonal consecutive quarter-on-quarter trends aligned with year-on-year comparisons, and also doing more than looking at the last 6 year's average price of AAPL stock to cash flow and earnings, I come up with a reasonable trading price of $450-500 for AAPL stock for some point in 2011. This derives from the Value Line chart which shows AAPL trading at about an average of 22X cash flow for the past 6 years. Of course, few traders forget that the third year of a President's term is usually a strong one for investors. (Of course, let's also not forget that the 3rd year of Herbert Hoover's term was not so hot.)

I am using $20/share for Apple's2011 calendar year earnings. (Apple is on a September fiscal year.)

Apple is growing at an amazing pace for a large company. In July, it preannounced $18 B for current quarter sales. Analysts are currently targeting $18 1/2 B. In its April 9 edition (merely 4 months ago), Value Line was predicting $14.8 B for current quarter sales. How often does a very large company have such a "beat"? I can't remember such an occurrence since the tech bubble.

So far as I can see, there is no undue speculation in AAPL stock. This does not guarantee positive returns, though. The stock will take a tumble if Steve Jobs retires. But I suspect that it is selling at about 15X CY 2010 and 12.5X CY 2011 earnings. Analysts have the company growing 18% per year over the next five years. In the past they have been conservative. These analysts thus have the stock at under 6X earnings 5 years from now. If Apple were selling 5-year debt, it would hardly pay any premium over Treasuries. So the prospective return from theoretical AAPL 5-year debt is perhaps 1.5% per year. Even if the stock is projected to sell for 9X earnings 5 years from now, it would then be projected to appreciate about 9% per year. This is quite an equity premium for a financial and operational powerhouse.

Compared to the S&P 500, AAPL is in far superior technical shape. The long-term 200 day (40 week) simple moving average of SPY (the ETF for the S&P 500)has begun to turn down. The 150 day sma is about to drop below the 200 day sma, and the 50 day sma is below both of them. SPY is now in a (mildly) bearish technical configuration. AAPL, in contrast, has bounced off its rising 150 day sma, which is properly aligned in a bull market configuration above a rising 200 day sma. AAPL is of course well above its 2007 high stock price of around $200/share, which at that time represented about 40 times its cash flow for CY 2007. I have been using the ability of a commodity or security to move to new highs compared with the pre-Lehman implosion as a sign of fundamental strength. I want to be invested where the charts are fundamentally "strong", given that I believe there are probably a few years of challenging economic and financial markets ahead of us in the U. S. (Thus I said positive things about MCD and CB recently based on operational and chart considerations.)

While from a sure thing (which does not exist in investing without illegal inside information), AAPL is similar to gold from an investment standpoint. Both marched on to new highs after the onset and current aftermath of the Great Recession/credit collapse/depression. Gold is within 2% of its all-time high and is up more than 30% from one year ago. AAPL is both further off its high but in an offsetting manner is up more than 50% above its year-ago price. Neither pays a dividend, and more and more people don't care about that, given that money of zero maturity (cash in the bank) pays little or nothing either.

AAPL and Au are also polar opposites. The former represents many of the best attributes of free market capitalism. It represents the future and appeals to techies and the young, among other groups. The latter appeals in many cases to older people who wish to preserve accumulated wealth against the ongoing Fed and governmental policies in many countries.

There are many cases where a "barbell" approach appeals to investors. This approach could involve holding cash and long bonds but no intermediate term bonds. For metals investors, it could involve holding gold and a very base metal, but not silver, platinum or semi-precious metal. For investment funds, I continue to find gold and AAPL stock as an interesting barbell approach to core investments in what continues to appear to be the bizarre world of central bank-mediated zero interest rates and federal deficits which despite the Summer of Recovery the administration promised two months ago show little sign of shrinking substantially.

Given the good news that iPhone demand apparently is "very robust" and added to a strong revamped iPod product line and rapid growth in iPad and core Mac sales, with growing exposure to sales outside of North America, I like the risk-reward in AAPL stock.

As a topic for another post, one reason I continue to "like" gold (meaning I give a Bronx cheer to Treasury's and the Fed's management of the dollar) is the price action of silver. Silver's 150 day sma has joined its 200 day sma as being in record territory (post 1980). Money-printing is pushing prices upward to record highs in MCD and to or near 12-month highs in CB, gold and silver.

The adage of "don't fight the Fed" continues to apply. I continue to look for the best risk-reward assets despite Fed policies I oppose. This takes some cognitive dissonance, but I'm liking the taste of golden apples so far.

Copyright (C) Long Lake LLC 2010

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