Apple: A Fallen Angel?

Jim Powell Principal Analyst, Global Changes & Opportunities

Jim Powell takes a contrarian position on a leading technology firm — once a market darling, but more recently, a market underperformer. Here, the editor of Global Changes & Opportunities Report explains why he sees long-term opportunity in this "fallen angel".

Steve Halpern:  Joining us today is one of my favorite guests for MoneyShow — Jim Powell, editor of Global Changes and Opportunities Report.  How are you doing today Jim?

Jim Powell:  I'm fine, Steven, and how are you?

Steve Halpern:  I'm great.  Today we're going to focus on the tech firm that's been one of the world's most successful companies, yet has seen its stock significantly underperform.  Indeed you now call Apple (AAPL) a fallen angel.  Could you explain what you mean by that?

Jim Powell:  Yes, Apple is a classic fallen angel and that is of course a large company that was doing very well and had a lot of followers on Wall Street and then something happened to disappoint investors and they bailed out and the stock fell.  

If the company in question is one with good resources and the track record is that they are very good, that they bounce back after a year or so.  I think the same thing will happen with Apple and make people a lot of money who are patient and buy it now.

Steve Halpern:  You point out that Wall Street has had similar concerns about Microsoft (MSFT) in the past, but then that stock went on to outperform.  Could you comment on that comparison?

Jim Powell:  Yes, actually it's quite a good comparison I think.  Apple got into trouble because people realized that the iPhone sales were beginning slip.  That was the biggest money-maker for the company.

So iPhone sales begin to slip and that happened about June 15 or so of last year.  Apple was $132 and change at the time, and then it dropped to $90.34.

Well, Microsoft we had a similar situation where people were beginning to realize they didn't need to have every new version of Windows and every new version of the Office Suite and Microsoft also went into a very steep decline.  

That company lost about 72% from December 1999 to February 2009, but Microsoft had a lot of money and a lot of talent and they just said, “O kay, we have to reinvent ourselves.”

And that's what they started to do and they started coming out with a whole lot of new products that the public has liked with the X-Box and Groove Music and lots of movies and games and really expanded its Cloud business.  It bought Skype and today Microsoft is doing very well.  

I think we can expect the same thing out of Apple.  They have $233 billion in cash.  They've got absolutely top-notch talent with a proven track record for coming up with new products that people love.  

Perhaps its biggest advantage right now is that it has over a billion devices in use around the world and every one of those is owned by a potential customer for new apps and services.

Steve Halpern:  Counter to the many naysayers on the stock you suggest that Apple may even surprise investors with new products, and you've speculated that a bid by Apple for Netflix (NFLX) could move the company into the promising video area.  Could you share your thoughts on these possible moves?

Jim Powell:  Yes, it looks as if Apple is going to make a major push in video and that's wise for the company.  With all of the people that purchase the iPhones and all the rest of the products they are ready customers for video services and the millennials really like video.

But video has a big problem and that's getting content.  It's one thing to get the technology, it's another thing to get the movies and games and everything you want to sell to people.  

If Apple tries to start that business from scratch it's going to be a real uphill battle.  It makes a lot more sense for Apple to buy Netflix or another big provider, and I think it will be Netflix.

Steve Halpern:  Could you comment on the stock's current valuation, because I know when somebody is interested in a “fallen angel” they are going to be worried about what the current value is when they buy the shares.

Jim Powell:  Well, the PE is only 11.1 as of today and it's 16.7 for the Dow and almost 25 for the S&P 500, so that is a substantial discount to the other indices for the stock market.

The yield is a more modest 2.31%, but yields have a tendency to go up over time as companies become more successful and distribute more of their profits to investors.

Steve Halpern:  You are well known in your model portfolios for doing in-depth research and then buying and holding stocks for long-term appreciation.  Is it fair to say that Apple at current levels is a long-term position that you think somebody should be buying today for multiple years in the future?

Jim Powell:  Well, I would say that if I didn't see any progress in three years I'd be very surprised.

Steve Halpern:  Again, our guest is Jim Powell, editor of Global Changes & Opportunities Report.  Thank you so much for sharing your insights today.

Jim Powell:  My pleasure.

By Jim Powell, Editor of Global Changes & Opportunities Report