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Is it time to take a bite out of Apple, Inc (AAPL) or leave it on the vine? After reviewing the current list by examining the stock yields and price-to-cash flow (P/CF) we will take a look at Apple for 2010.Yesterday I dropped two stocks, but the list is still too long. In the coming weeks there will be more cuts and if I find anything of more value perhaps there will be something new.
Current Contenders
Dividends are a very important part of overall returns. BTM paid its last dividend in April 2009, but the payments have been irregular, while rewarding. DEO is rock solid paying an above average yield regularly. AEO and GE are a little above average also, and BF.A and DE are right behind them with dependable, but average yields. With the exception of Berkshire and EZ Corp, which never paid a dividend, the others halted dividends because of the economy.
- Brasil Telecom (BTM) Yield 7.62%
- Diageo plc (DEO) Yield 3.26%
- American Eagle Outfitters (AEO) Yield 2.52%
- General Electric Company (GE) Yield 2.47%
- Brown-Forman Corporation (BF.A) Yield 2.09%
- Deere & Company (DE) Yield 2.06%
- TNT N.V (ADR) (TNTTY) Yield 083%
- Anadarko Petroleum Corporation (APC) Yield 0.60%
- Anglo American ADR (AAUKY) None
- Berkshire Hathaway Inc. (BRK.B) None
- E-TRADE Financial Corporation (ETFC) None
- EZCorp Inc. (EZPW) None
- Grubb & Ellis (GBE) None
Price-to-Cash Flow looks good for most of these stocks, with a P/CF of 10 being the dividing line according to many Wall Street veterans, but who wants fair to middling? Given that perspective BRK, BTM, and ETFC seem like a steal while GE is quite the bargain. For the rest, my attention is drawn to BF.A, looking pricey, and GBE which is in pain.
- Berkshire Hathaway P/CF 1.01
- Brasil Telecom P/CF 2.22
- E-Trade P/CF 2.75
- General Electric P/CF 5.37
- Anadarko Petroleum (APC) P/CF 6.97
- TNT Post P/CF 9.06
- EZCorp Inc. P/CF 9.25
- American Eagle Outfitter P/CF 10.01
- Anglo American ADR P/CF 10.06
- Deere & Co. P/CF 13.18
- Diageo plc P/CF 13.43
- Brown-Forman P/CF 15.08
- Grubb & Ellis P/CF -2.40
In yesterday's review both makers of alcoholic beverages were on the edge. Today we see they both pay a dividend to the good and make you pay up to get it when you look at P/CF. I have decided to drop one of them for diversification purposes given how small the portfolio is going to be. Since Diageo has the better yield, super high ROE and a more reasonable buy-in on a P/CF basis I will be dropping Brown-Forman. Also weighing on my decision is that DEO is foreign based, has more top brands and made greater inroads in India and China.
Like Abbott Laboratories (ABT), Brown-Forman is a fantastic stock that would be a smart core holding for a long term or Roth IRA portfolio but the potential for the next 12 months is modest.
And then there is Apple...
Apple has been on a roll for the last few years, last month reaching an all time high of $208.00. Yesterday it closed at $197.80. Given its current price and all the positive news about the company broadcast on a daily basis and the fact that retail investors love it -- I don't.
The stock is selling at an insane P/CF of 26.47, 70% higher than BF.A which I just cut and it pays no dividend (yet). It does have a strong ROE of 23.5 compared to the S&P but it looks only average among the 2010 contenders, and the P/B is also pricey with a very average P/S of 2.37.
Sure it is possible that Apple comes out with another winning product but that rampant speculation is among the things that have driven the stock price to where it is. I think the downside outweighs the upside by a large margin so I will pass on this one.
Naked puts (sell to open put options) See Chasing Value: Ten stocks for 2010 -- Part 4 for the analysis with a follow-up yesterday of these Options:
- ETFC -- April 2010 puts (EUS-PY) with a strike price of $1.50 are offering 23 cents a share.
- EZPW -- March 2010 puts (ULP-OC) with a strike price of $15.00 are offering $1.00 a share.
- WFC -- April 2010 puts (FHU-PA) with a strike price of $27.00 are offering $3.30 a share.
Stay tuned to Chasing Value as the adventure continues. If you to want to start the journey from the beginning here are the links: 2010 picks: Part 1 / Part 2 / Part 3 / Part 4 / Part 5 / Part 6 / Part 7 / Part 8
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: Among the positions discussed in this post I own shares of DEO, ETFC, EZPW, GBE, GE, WFC.
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Reader Comments (Page 1 of 1)
12-10-2009 @ 6:57PM
Xof said...
"The stock is selling at an insane P/CF of 26.47, 70% higher than BF.A which I just cut and it pays no dividend (yet). It does have a strong ROE of 23.5 compared to the S&P but it looks only average among the 2010 contenders, and the P/B is also pricey with a very average P/S of 2.37."
Are these your only arguments?
What about the App Store growth? The new tablet + percentage of every book sold, further boosting the company's earnings potential going forward? What about the increasing computer market shares?
12-10-2009 @ 9:35PM
Sheldon L said...
Xof,
You ask, "Are these your only arguments?
1) Investing in any stock at it's all time high has been historically risky. When you add the fact that this price is supported by people who are willing to pay such a high premium over other equally fine companies there should be some doubt. I stated that Apples P/CF is 70% higher than BF.A, but the mean line is 10.0 so it is 165% higher than anything remotely desirable. Berkshire Hathaway, as the best example, offers a monster cash-flow for a bargain price and I am saying that BRK will cream Apple in 2010.
2) Perhaps, as you suggest the Apple store, tablets and increased computer sales will continue to add value. The problem is that this is all priced into the stock now. For the stock to continue to fly Apple will have to do something beyond your expectations.
3) Even if Apple comes out with a new product there is no assurance that it will be a success. It is a very tall order for a new product to do as well as the past hits when those hits are among the best of all time. Look up the Apple III and the Lisa and Apple TV products to find well branded duds.
Since the current stock price assumes the best -- (as your own overly optimistic view implies) -- what if a quarterly report falls short? The stock price will slide.
Finally, as a warning to other readers, and with all due respect, if Xof, a "retail investor" is thinking AAPL is a good investment at it's all time high -- that alone should tell you it's time to run!
12-11-2009 @ 6:41AM
Spacehopper said...
Sheldon,
Wont the new accounting rules that Apple will be employing soon, suddenly make the stock look very cheap?
Also with increasing market share and good reports coming in for this current quarter’s sales—to be reported in January—makes Apple look very inviting as an investment.
This company keeps blowing-out all expectations even in this economic climate. With the economy improving, Apple can only go one way at this time, and that is up, up and up again.
12-11-2009 @ 11:03AM
Sheldon L said...
Spacey,
You could not have made my case any stronger than you did with this statement,
"Apple can only go one way at this time, and that is up, up and up again."
'nuff said.