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Forget Icahn; Stick with Apple
05/05/2016 8:00 am EST
Contrary to what many want you to believe, corporate activists are not in it because they believe in the goodness of their actions. They’re in it for the profits – pure and simple, asserts Keith Fitz-Gerald, editor of Total Wealth.
Studies show that raider activists work their magic over the short term, typically anything from a period of months to right about three years.
What you need to understand is that they are usually not aligned with long-term value, let alone your interests as an individual investor.
Activist investors force false attention on the short-term metrics they need to make their highly leveraged and short-term investment positions pay off.
When billionaire activist investor Carl Icahn announced that he had dumped his Apple (AAPL) holdings, legions of investors followed. I can’t think of a worse mistake.
Ostensibly, the billionaire – who says he made $2 billion from his investment in Apple -- dumped his shares because he’s concerned about China. At least that’s the story he’s spinning publicly.
I simply think he couldn’t get what he wanted: more leverage, and a short-term boost in share prices based on the financial engineering and a more aggressive buyback program.
Meanwhile, Apple’s a bargain in the mid-$90s for any investor with the right perspective. It’s worth noting that Apple still recorded revenue of $50.6 billion last quarter and gross margins of 39.4%.
Further, iPhone sales are still up 17% year over year; people are simply griping about the fact that they aren’t climbing as fast as they were 12 months ago.
What’s more, services growth is nearly 30% a year and climbing. This is a logical outgrowth of slowing sales as more people repair what the Apple devices they have rather than upgrade to the newest models.
It’s also a viable source of future revenues that the markets have all but thrown out the window in the past few days.
And, finally, the company has traded to such low levels on nothing more than a knee-jerk reaction that the PE ratio is a mere 10X earnings. Put another way, Apple’s being priced like it’s never going to grow again.
You and I know that won’t happen. Apple is hardly going to fade into oblivion.
The yield is now 2.37%, which beats 10-year bonds while also giving you growth that comes from owning the stock.
The company also holds more than $200 billion in cash and has returned more than $163 billion to investors since August 2012. My take is Apple is still worth $200 a share.
Keith Fitz-Gerald, Editor of Total Wealth
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