My smartphone position

When you have a significant idea take a significant position.

My idea is that Apple (AAPL) and Google (GOOG) are cheap - very cheap. Here are my recent purchases to build up a position:

05 Jan 2010 - Buy 3 GOOG @ $624
13 Jan 2010 - Buy 4 GOOG @ $572
09 Apr 2010 - Buy 9 AAPL @ $251
12 Jul 2010 - Buy 4 GOOG @ $507
26 Jul 2010 - Buy 6 AAPL @ $273
19 Jan 2011 - Buy 8 AAPL @ $342
10 Jun 2011 - Buy 5 GOOG @ $512
07 Jul 2011 - Buy 6 AAPL @ $358

My GOOG position is showing a slight gain and AAPL is showing a significant gain.

I thought I would plug some numbers into Benjamin Graham's stock valuation formula to see if they are still cheap.

Here are the figures I am going to use:

AAPL EPS = 21
AAPL Growth = 20%

Using the simple formula (see here)

Value = 21 * (8.5 + (20 * 2)) = $1018

This takes no account of the amount of cash per share AAPL has and uses the GAAP figures and a conservative growth estimate!

Now lets try the more complicated formula that takes into account current bond yields:

Value = ((21 * (8.5 + (20 * 2))) * 4.4) / 2.67 = $1678

So AAPL looks pretty cheap at its current price of $357!

Now I'll plug in GOOG's figures:

EPS = 26
Growth = 15

Value = 26 * (8.5 + (15 * 2)) = $1001

And the more complex formula gives a value of $1649

I wonder if any analyst would be brave enough to publish these figures as a target price? The answer is no as they have to save their face.

Of course the risk is that the companies will not keep growing over the next 10 years. However even if the companies only grow at a rate of 10% over the next 10 years they are still undervalued.

I have seen several articles on how to play the smartphone revolution by investing in component manufacturers like Qualcomm and Samsung. Well you could but why not just invest in the players at the top of the value chain? They have the brand and the momentum whereas a component manufacturer can be silently replaced without the public caring.

GOOG and AAPL are cheap - very cheap. This is my position on smartphones.