This morning I committed a moderately substantial sum of my savings to a purchase of Apple stock (AAPL). As discussed in previous columns, I am focusing much more heavily on stock investing and saving in 2013. Though I still have used a few of my travel and credit card tricks, I believe I am on a path to real wealth, not just nickel and dimeing my way to moderately better experiences. Although Apple is obviously a quite famous company and it may seem like dumb money to make it one of my first investment, I think I have sound reasoning.
First of all, my guiding principle in all of my investments will be a “buy and hold forever” strategy. I am looking for a company at a good price that will continue to grow and compound over time. Thus, I am not overly concerned with near term problems, but looking to identify strong and safe businesses with a “wide moat” who are currently undervalued.
Most companies are reasonably valued when their price to earnings ratios is somewhere around 15. Stocks in this range tend to have higher returns over time than others who are trading at a higher P/E premium. Of course investing is filled with all kinds of caveats, and some businesses with very low P/E ratios may suggest an industry that is dying. Those with a very high ratio may potentially be lucrative, and it is a vote of confidence of sorts that the market thinks there is promise in this company and its business.
Apple’s P/E is currently at 8.86, suggesting an extremely undervalued company. It is far lower than peers like Microsoft, Hewlett-Packard, Intel and other tech companies. This would suggest Apple is in a declining business, but of course electronics have only become more ubiquitous and smart phones, tablets, and laptops are in many ways essential items and must purchases for those moving into the middle and upper middle class. Apple also has an incredible ecosystem that would seem to keep consumers with their products, due to the ease of them talking to each other and sharing items like video downloads across devices. It is interesting to me that other companies like Google, Amazon, and most recently Microsoft are rising in value due to meagre attempts to penetrate and enter the kinds of consumer fields that Apple already dominates.
Apple also has important brand loyalty, and a great reputation for quality products and high craftsmanship. It is one of the world’s most admired companies in terms of design and innovation and consumers tend to come back to its products again and again.
While the market for smartphones, tablets, and ultra thin laptops may not be brand new, Apple is well served to pivot and enter into all kinds of consumer electronic areas. One can easily see its iconic user interface and experience in all kinds of devices from automobiles, to TVs, to watches, to speaker systems, to appliances.
Apple’s balance sheet is sterling. It is sitting on a mountain of cash and could write a check to buy several major American corporations without and debt financing whatsoever. With CEO Tim Cook’s hesitancy to return large dividends to investors despite activist shareholder pressure, I have to believe that there is a plan in place to use this cash effectively.
Finally, on the subject of dividends, even if Apple is a mature company like GE or some other industry leader, that means investors are likely to see the stock price rise higher to the 15 P/E barrier and increase dividend payments, thus delivering wealth.
All in all, Apple is a strong company and an industry leader trading at a cheap price. I think mostly this is irrational, with weird fears of Samsung and over worrying about the future.