Newton's Fruit Still Falling Upwards, and Other Observations

With markets at a strange "new normal" of zero-ish interest rates for heavily indebted but "safe" sovereigns, and where an historically normal long-term interest rate of 6-7% for Italian debt is, we are told, unsustainable, a relative sanity prevails in a few sectors of other markets.  To wit, large-cap technology stocks are, despite operating in growth fields, relatively cheap.  Amongst them, none is as large or as cheap as Newton's fruit, aka AAPL.  As much of the investing public knows, Apple discloses how last quarter went for it on Tuesday afternoon.  It will offer a hint of the current quarter.

Apple is growing at an enormous rate.  Last quarter, its operating margin soared to 47%.  It has made no $6 B acquisition as MSFT just has written off.  There will be no writeoffs.  More importantly to me, there will be no non-GAAP earnings presentation.  There will be no acquisition of "cheap" debt. 

For those occasional investors who do not follow all things Apple as I do, the company has been on an unrecognized roll in key but under-reported areas.  It has been securing potentially important legal victories over Samsung in the court battle in California heard by the Korean-descended Judge Lucy Koh.  Florina Mueller, an expert blogger on these matters, said this past week: 

I've said it before that whatever happens at the upcoming trial, Samsung won't be forced out of the market, but a very significant breakthrough for Apple's intellectual property enforcement is increasingly likely.

Mr. Mueller is a cautious blogger.  It means something when he words this so strongly.

Competitively, Microsoft appears confused with its transition to Windows 8.  Unlike Apple, which is adjusting its Mac OS toward that of iOS but keeping it different, MSFT is going all in on the tablet-phone OS for Windows.  This is tres strange, given that MSFT has almost no market share in mobile devices.  Worse, MSFT's partner in telephony, NOK, had its debt rating lowered into deeper junk territory last week.  Also horrible for the Microsoft ecosystem is its "Surface" tablet product.  Mr. Softee is now entering into direct hardware competition with the hardware licensees that have been so

I suspect that as Retina Display-enabled Macs roll out and few Windows customers "upgrade" to Win 8, the Mac's market share in "PCs" will increase.  At some point, there could be a tipping point in which the Mac platform regains the lead over Windows in desktop and larger-than-iPad mobile computers.

Last but not least, the iPad is the product of the decade.  (The iPhone was the product of the prior decade.)  The iPad is estimated to have 90% share of its category, namely 10 inch tablets.  It is up to Apple whether it wants to make Google's new small tablet, Amazon's Kindle line, etc. wildly unprofitable by launching a mini-iPad.  Small matter.  The iPad is Apple's main entry into the business market.  The iPhone is a worthy partner.  Tim Cook, as an ex-IBMer and an MBA, is much more oriented to succeeding in the business world than was Steve Jobs.

A few months ago, Apple's head product designer, Jonathan Ive, disclosed that the current project he is working on feels like Apple's most important project yet.  One doubts this is simply the next iPhone iteration.  Assuming it is the long-awaited full-size television, and that it launches next year, Apple will have in 2013 a rapidly-growing iPad product or product line, an important and still-growing iPhone product, a potential third blockbuster television product, and a Mac line that continues to gain market share and could surprise to the upside.  Plus, iTunes is a large business that sooner rather than later would be a Fortune 500 company all on its own; and iPods remain a cash cow that both require no advertising expense and are so small that they take up little display room in Apple stores.

Apple is the financially strongest corporation in the world.  It has the fastest growth of any large company.  Its retail presence is so strong that if it wished, it could increase its marketing of other companies' products, thus filling any temporary gaps in its own product lines.  It is becoming more like an integrated oil company in that it is expanding its manufacturing operations backwards along with the growing direct retail presence.  Its dividend yield exceeds that of the 10-year T-note.  Value Line anticipates that it will have at least $200 B book value, with no intangibles or goodwill on the books, by the end of CY 2013.  It could easily earn $50/share this calendar year and could easily earn $100/share by CY 2015.  Why is its P/E below market when it has the best financial statement and the fastest growth of any large company in the world?

I think the answer is that the business and analytic community has never seen any very large company grow so fast organically.  There is fear that somewhere, somehow, Apple will go the way of RIMM and NOK; so, the analysts "won't get fooled again".  LOL.

Regardless of how trading goes before and after earnings, AAPL is IMHO the best growth stock around.  It is growing at an unbelievable rate.  It sells at roughly 10X expected CY 2012 earnings net of expected cash and marketable securities on hand by end-2012, even after "haircutting" the value of offshore assets.  Yet its two major product lines are early in their life cycles, and a major new product line may well be introduced next year. 

So far as I can see, most stocks are overpriced given the serious economic and financial dislocations that exist today globally and in the U.S. and other leading economic powers.  AAPL is an exception, though it is not a "Graham and Dodd" value stock.  (LOL again)

The only other stocks I find worth owning include the occasional DE-type of reasonably-priced cyclical stock and a few other high-quality equities, but I think they get cheaper before they get more expensive.  Then, for now, there is the derivative bond play, as it were, in the Con Ed-type stock.  Steady ED is simply too cheap if one believes that its dividend is secure.  You can own a 30-year T-bond at about 2.5% per year or ED at about a 50% higher yield with some inflation protection and- believe it or not- takeover possibilities.  With the 10-year yield at (say) 1.5%, ED should be about double its current share price to re-establish its historical relationship to that benchmark bond.  Thus ED is already discounting a major rise in interest rates. 

Spain is now widely recognized as bust.  I suspect that once Italy is so recognized, that will be the end of the bad news and it will be time to buy inflation hedges again.  John Mauldin is promoting France as next up.  I don't think that's in the cards, at least not this economic cycle, though of course we shall see what we shall see.  Thus my game plan for now strategizes 2012's coming hurricane season months as reprising some combination of 2008 (Europe's sovereigns taking the place of US financials this time around) and 2011, as economies lurch down again as they did last year in the pre-recessionary phase.

Meanwhile, the valuation and growth trends favor AAPL gaining a higher relative P/E to the market while earnings grow rapidly.  AAPL and ED, a strange combo to make up my investment faves.

Deere Apple: GARP's Time Is (Approximately) Here and Now

Just wanted to put in a quick stock comment.  Since I think that "safe" govvies are "played", I have gone to stocks with fortress balance sheets and unique large niches in core areas of the global economy.  Thus I bought back into Deere (DE), which I have traded at higher prices this year, perhaps making a buck or two but jumping out as I sensed the downtrend in the shares.  DE is heading for its 175th birthday.  It has seen a lot worse than the mess going on in Europe!  The P/E is about 9X projected 201s earnings, and its CEO was on CNBC a day or two ago reaffirming guidance and saying that construction is doing well in the US of A.  Value Line's "fair value" or "value line" for DE puts fair value at about $110, not the $75 it's now at.

Also, I scaled further back into AAPL, having largely gotten out around $620+ after the DOJ lawsuit broke and trading had gotten just too crazy in the stock.  Meanwhile, Microsoft came out with some event this evening that announced something more than vaporware but less than an actual product-- and was thus in stark contrast to Apple's recent WWDC where actual products ready to be shipped were announced.

Here is a pretty funny take on the event:
http://news.cnet.com/8301-17938_105-57455730-1/who-is-the-microsoft-surface-for-exactly/?part=rss&subj=crave&tag=title&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+cnet%2FpRza+%28Crave%29

I also received an impressive e-mail from a techie who may be switching from PC's to the new Empire after being blown away by seeing the Retina display on Apple's new MacBook Pro 15 inch portable computer that was unveiled at the WWDC.  He is looking at much higher AAPL prices, soon.  Unlike yours truly, he actually knows the hardware-software industry as a veteran insider.  I'll publish his comments in full if he allows me to.

With interest rates so low, patient money that does not have to mark to market and thus can ride out what might be a very stormy time in the weeks and months ahead will, I think, outperform most bonds with a truly select group of dominant equities that generate strong free cash flow.

Thus I have added select GARP companies to bond-like utility stocks as I have moved away from the highly-appreciated bonds that now have more risk than reward as I see it.

Mr. Softee Goes for the Big Blue Pill

The beginning of the end of Microsoft as an interesting investment has occurred. Bloomberg.com reports Microsoft Said to Plan Debt Sale, May Boost Dividend.

The opening paragraph tells us you need to know:

Microsoft Corp. is planning to sell debt this year to pay for dividends and share repurchases because too much of its cash is held overseas, according to a person familiar with the matter.

Mr. Softee (the standard Street moniker for MSFT) is going the route of the federal government and before it IBM, the stock of which has also been range-bound for, let us see-- forever! (Or so it seems.) For no good reason other than to appease constituencies that are non-core, meaning constituencies that are NOT their customers, it has now committed to the route of pumping the stock price since AAPL/GOOG and others have defeated it in the game of corporate "Go" and blocked all its growth paths. It's all over now, baby Big Blue, but the Brownian stock motion.

Copyright (C) Long Lake LLC 2010

The Stock Market is Yesterday's Leftovers with Mr. Softee the Latest Case in Point

Stock prices will indeed fluctuate, because that is how the financial community makes money.

Behind the worn facade of beating the Street by a penny or two, reality does exist in the form of historical quarterly reports by corporations.  Today, Microsoft fessed up to its maturity.  It has rapidly gone grey.

The December quarter for Mr. Softee represented a negative surprise, with earnings of $0.47.  The Value Line MSFT report of 2/20/09 indicated March quarterly sales of $14.00 B and earnings of $0.40/share.  Today we learned that sales were only $13.6 B, earnings excluding writedowns on assets (this is not limited to financial companies!) were $0.37, and guidance was withdrawn.  Operating margins were about 34% and have been eroding for 10 years, when they were 56%.  The company has about $17 B of net working capital and little other tangible book value.

Operating expenses are being cut.  Microsoft is not in "runoff" mode, but it is trading post-earnings release at 10X tangible book value and almost 3X sales.  It has lost almost all creativity; it has made no impact on the Internet.  Yours truly has no idea what the discounted present value of its future cash flows will be, and neither does any analyst.  

Consider however that earnings in the March quarter were $0.50, 0.47 and now about 0.37 per share in 2007-9.  

MSFT exemplifies much of what is wrong with American business.  It is too big to grow much more and in fact is shrinking for real ($60 B in sales); it is too strong and important to fail; its management is rich and entrenched; it is discounting its wares:  there is no pizzazz.  Yes, the stock was halved in a year and a half and may be ready to rebound, but the thrill is definitely gone.  

AmEx also reported this afternoon, projected ugly consumer default rates, missed earnings estimates that Value Line also published 2/20/09 (when it traded at $16/share).  In keeping with the times, naturally it traded up sharply after hours.  Earnings for AXP this quarter were about 1/3 less than in the same quarter 4 years ago.  Absent government action and conversion to bank holding company status, who knows what this company would be like by now?

Perhaps stock traders are relieved that these behemoths aren't going bankrupt!  

Seriously- when giant companies such as MSFT and AXP ruthlessly cut costs (meaning fire people) and show extreme cyclicality, yet trade well above book value and have uncompelling dividend yields, they are not on the true bargain counter.  And these are high quality, beaten down stocks.

The "laws" of cyclicality suggest that at some point there will be true bargains in some financial asset class, as stocks were in the late 1940s and early 1950s and bonds were in the 1980s.  It's hard to find any such assets now.  Patience continues to make sense.

Copyright (C) Long Lake LLC 2009