The Lato Letter: Volume 2, Issue 11.

The Lato Letter: Volume 2, Issue 11.

The answer to the subject line of the email you just received is “NO” or at least not yet. It has been a while since I have written about Apple (AAPL-NASDAQ, $498.50), the last time being on April 24th after their 1st quarter earnings announcement. It is certainly time to discuss the company and the stock again after this week’s news. Fuelled by the news, Apple has enjoyed its best three-day move in over three years, rising 10% this week.

In case you missed it, on Monday it was reported that Apple will be having a presentation on September 10th to apparently announce the release of the next iPhone. That was followed on Tuesday by the “tweet” from Carl Icahn, the billionaire activist investor, that he has invested over $1.0Billion in Apple and has initiated conversations with Apple’s CEO Tim Cook with respect to capital allocation within Apple.

As an aside, there has been some discussion as to whether Icahn’s tweet could be deemed market manipulation. I disagree with this notion since Icahn would have had to disclose his position by August 15th anyway. That being said, it certainly didn’t hurt the stock as it hovered around its 200day moving average.

As you can see on the chart below, Apple has clearly broken the downtrend that started last September. From a technical point of view, after having broken above its 20day and 50day moving averages in the last two or three weeks, Apple has now blasted through the important 200day moving average.


As I have stated many times, technical analysis is a tool that can be useful but not one that you can build a whole house with. Technical indicators do matter but when you buy a stock, you are buying a piece of a business and investors must determine whether or not the price being paid for that business is justified given the underlying fundamentals of the business.

During the painful decline of the last 11 months, I continually argued that fundamentally Apple’s price was justified based on its business outlook and continue to feel that is the case. The negatives have been well discussed; the slowing growth rate of the smart phone market, Apple is losing market share to Android based phones, Apple’s margins are shrinking and Apple has lost its innovation power with the passing of Steve Jobs among others.

All of those negatives do have some truth to them but they have been more than adequately discounted in Apple’s share price and continue to be today. Apple remains a very strong and ably managed company that will continue to improve its product offering and please its customers. In the last year, the consensus estimate for Apple’s earnings for the year ending September 14, 2014 has fallen over 40% and currently sits at $42.38. Based on those earnings and today’s closing price, even after the 10% move in the last three days, Apple is trading at a price/earnings (P/E) multiple of less than 12 times. Stripping out the $145 per share in cash that caught Mr. Icahn’s interest, the P/E multiple drops to just over 8 times next year’s earnings.

Obviously, this is not a dissimilar argument than the one that was made during the decline but the reality is that the company, after being very quiet on the product front for the past year, is on the verge of a new product cycle that includes both new hardware and new operating systems for its mobile devices and personal computers. Apple may not enjoy the hyper growth that it did a couple of years ago but the strong brand combined with the “Hotel California”** element of their ecosystem creates ongoing demand for not only their products but also for their services. Those services, whether it be iTunes, iBooks or the App Store are becoming increasingly important revenue sources for the company and who knows, maybe even an iWatch some day.

So, if the answer to the question is “No, not yet”, when do you sell? As a portfolio manager, I will be very mindful of clients’ equity portfolios exceeding 10% in one stock regardless of how much potential that stock has. Having added more Apple to most clients’ holdings in February, that 10% threshold will come much sooner than the previous high last September. As clients reach that threshold, I will trim the position but certainly maintain an overweighted position in the stock while the new product cycle plays out.

** The ending lyrics of The Eagles’ Hotel California: “you can check-out any time you like, but you can never leave”.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change without notice.

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