The Lato Letter: Volume 4, Issue 2

The Lato Letter: Volume 4, Issue 2

The old stock market adage “buy on rumour, sell on news” was certainly evident yesterday as Apple held its “Spring Forward” event. Long anticipated details of the Apple Watch were revealed and on the whole the details were without many surprises, either positive or negative.

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As you can see, at the 1:00pm start of the event the stock was $127.13, up 53 cents on the day. Tim Cook opened by quickly discussing Apple’s retail store growth; noting that they had opened six stores in China in the last six weeks as part of the plan to bring their current lineup of 21 stores in China up to 40 by mid-2016.

Next on the agenda was Apple TV and the announcement that they will be the exclusive initial partner of HBO Now, the new video streaming offering by HBO (not sure if that includes Canada) and the price reduction of Apple TV from $99.99 to $69.99 (US$ prices). The stock inched up during this part of the presentation to $127.77.

Cook then happily announced that Apple has reached 700 million in total iPhone sales and enjoyed an unprecedented 99% customer satisfaction rating on the iPhone 6 and 6 Plus. During the ensuing discussion of the new iPhone capabilities, Cook announced the release of Research Kit that will work with Health Kit to further medical research. Working in conjunction with several leading medical research centres such as Stanford Medical, Mass General Hospital, University of Oxford and several other research centres to initially develop five apps to enhance research on Parkinson’s, Diabetes, Cardio-vascular Disease, Asthma and Breast Cancer.

The price inched up to $128 as Phil Schiller, an Apple Executive VP took the stage to discuss the new MacBook. The new MacBook was the highlight of the presentation and is truly a magnificent engineering accomplishment. Weighing in at only two pounds, 24% thinner than its predecessor while using 30% less energy. There are many other new features that were equally impressive and the stock price reacted positively to touch $129.57 prior to Tim Cook re-taking the stage to discuss Apple Watch.

I felt that the Apple Watch appears to be an equally impressive product but this is where the “sell on news” part comes in. As mentioned earlier, there were no major surprises about functionality, price or battery life. There were many reports prior to the event and therefore positive surprises were difficult to attain. From its day’s high, the stock trailed off as the presentation concluded and briefly traded into negative territory afterwards.

The stock did rally to close up 49 cents at $127.09 and I have come out of the event with two major takeaways. The first is the incredible engineering that went into the new MacBook which prompted the rise in the stock price as it was unveiled. This engineering prowess is one of the major competitive advantages that Apple enjoys. The cash flow that it directs to research and development to continually perfect older products and develop new ones will provide earnings growth for years to come.

The second and most important takeaway, and yes I can be accused of being a perma-bull on Apple, is that “the sell on news’ creates one more opportunity to enter an incredible company at a very, very reasonable price. Although as the two year chart below shows, Apple is obviously trading at all-time highs and at a greater total value than any company ever has but it is still trading at an attractive valuation of 14.8X earnings for September 2015 and 13.8X times next year’s earnings.

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One last thing to consider, on September 9, 2014, the day of the Apple Event for the release of iPhone 6 and 6 Plus, arguably Apple’s most successful products, the stock closed down 37 cents to $97.99 marking one of the last times the stock has traded below $100. The next notable event should occur in early April when Apple is expected to announce their plans for capital deployment through buy backs or an increased dividend.

At a multiple of less than that of the market, new products in the very near future that further fortify the Apple ecosystem and allow for continued earnings growth, Apple remains Padlock’s heaviest weighted holding.

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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