Monday, July 25, 2011

Going all in with Apple

Last Friday I sold most of my Google position and bought more Apple. This makes my Apple holding my biggest position ever by quite some margin. Why did I do it? I was inspired by two facts:

1) Apple's free cash flow (FCF) per share was higher than Google's last quarter. I calculated Apple's at $11.23 and Google's at $8.07. However Google's share price is over $200 higher. This despite the fact the Apple is growing much faster. If Apple stopped growing right now it shares would still be fairly priced.

2) Charlie Munger said I could. Seriously at a recent Berkshire Hathaway shareholder meeting Charlie said that he once had over 100% of his portfolio in one stock (meaning that he used leverage.) He thinks that it is less risky to invest in one company you know really well that to diversify into a number of companies that you know less well. On the whole I agree with him so my aggressive portfolio is now 100% Apple. However I am not sure that I would recommend putting all your savings in one company. Although you may understand the company and its market you may not understand all the macro-economic factors that could affect it. Investing in a handful of promising opportunities that you really understand may be the best option.

One problem with having only one stock in a portfolio is that it makes for painful viewing when the stock is having a bad week or month. However I have other portfolios I can look at and I am not one to panic.

When the next iPhone is announced the stock should get a modest boost and iPhone and iPad should sell like hotcakes in the 2011 Christmas season.

Now that I have a big position it is time to hold on and enjoy the ride.

Friday, July 22, 2011

Is Apple fully ripe?

Another blow-out quarter from Apple, another market under-reaction.

Here is one key statistic: Free cash flow for the last quarter was over $10 per share. If you annualise that to $40 Apple has a Price/FCF ratio of under 10! And yet earnings growth was over 100%!

The reason Apple is so cheap is clear - its market cap. of $358B. How can a company that big grow fast in the future?

To get the market cap. in perspective, Research In Motion (the Blackberry maker) has a market cap. of $15B and Nokia has a market cap. of $22B. Microsoft has a market cap. of $228B

In order to continue growing at stellar rates Apple is going to have to grow its markets and enter new markets. For example the iPhone has grown the overall smartphone market as well as stolen market share from Nokia and others. The iPad has virtually single handedly resurrected the table market.

There are rumours that Apple is going to enter the TV market - probably by combining its Apple TV box with a flat screen. While this could be lucrative it is not going to be the next iPad - it would be for consumers rather than business and consumers do not change TVs as often as computers.

Could Apple double its earnings in the next couple of years? Quite easily and without entering any new markets. Apple has less than 10% of the global mobile phone market and less than 10% of the global PC market so there is plenty of room for growth there. Apple also makes bigger margins on its products than competitors as they are all at the premium end of the market.

So here is the problem. The numbers say that Apple is amazingly cheap. The market cap. says that Apples growth must slow.

But here is the odd thing: Apple is cheap even if the growth slows to 10%.

The risk - reward ratio is phenomenal for this one - still a screaming buy.

Friday, July 08, 2011

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 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.