While 2022 is marked in red ink for the majority of stocks, it’s been a good year for those in the Value persuasion, relatively speaking. Indeed, since 12.07.22. the Russell 3000 Value Index has posted a negative total return of 7.1% year-to-date against the 26.3% drop of its growth counterpart, the Russell 3000 Growth Index.
As of 10.31.22. Kovitz using data from Professors Eugene F. Fama and Kenneth R. French
Proponents of value investing hailed the trend reversal, which began on Halloween 2020, as the approach had been maligned in recent years. Of course, historical experience favors style over the long term as well as in times like this which has highlighted rising interest rates and inflation, a topic covered in a recent report that my team wrote.
The Cautious Speculator SPECIAL REPORT: Inflation 101B
GROWTH IS A COMPONENT OF VALUE
In my two most recent articles, I generally argued that two MegaCap tech stocks, Microsoft
MSFT
AAPL
After all, the consumer electronics giant was the first American company to reach a staggering $1 trillion market capitalization, before crossing the $2 trillion threshold in August 2020. Granted, Apple is a producer, having doubled its earnings per share since 2018 (a rate of almost 19% per year) and tripled since 2016 (20% growth per year), quite an achievement for a company of its colossal size.
In recent years, AAPL shares have been rewarded with a higher earnings multiple than the broader market. But there’s a lot of value to be had from the company’s ever-growing product base that goes hand in hand with its ubiquitous ecosystem.
Of course, as mentioned in my Microsoft and Alphabet specs, picking an attractively priced stock with nice upside potential is more than just a few valuation metrics. In fact, we at The cautious speculator have long argued that growth is a component of assessing the investment merits of any business. In fact, our three- to five-year target prices always take into account forward-looking sales and earnings expectations, not to mention brand strength, competitive position, product breadth and depth, and leadership prowess.
For additional thought on the subject, see our Special Report: Don’t Forget Value
DOMINATE TITLES
Although AAPL is best known for its consumer products that “just work”, its ecosystem acts as a kind of walled garden around its entire product line, which improves device interoperability and broadens the appeal of its additional services such as music and television. Apple now has more than 900 million subscribers to these services.
Sure, there’s been a recent kerfuffle about Apple’s ordering of its App Store tied to the company’s 30% revenue cut and the possibility of kicking Twitter out of the store, but CEO Tim Cook and Twitter owner Elon Musk seem to have found common ground and settled their disagreement.
Additionally, there have been several unnamed sources in the news citing supply constraints as the reason the company has cut iPhone production. However, while these checks can sometimes be the equivalent of a canary in the coal mine, Apple has many suppliers, who can see orders canceled for reasons outside of demand (e.g. poor quality and delays) . Of course, we’ve also seen rumors of Apple’s production cut turn out to be false.
We might add in this case that the Chinese government is feeling increasing pressure to abandon its zero-COVID policy, which has put Beijing in a lose-lose scenario. For the rest of the world, this should mean that constraints will ease, even as companies seek to diversify production to regions outside of China.
There is no doubt that the iPhone product upgrade cycle will reach a balance, in which case there will be a stabilization of demand from existing iPhone users. Nonetheless, the growth of subscription services should reduce the volatility associated with product renewal cycles. Moreover, the services segment produces a gross margin almost double that of products (iPhone, Apple Watch, etc.), which are impressive on their own (usually between 30% and 40%).
Apple’s balance sheet is also very strong, with a large cash hoard large enough to rank among the top 15% of S&P 500 companies by market value. The debt burden has also increased over the years, but (unsurprisingly) Apple’s credit terms are currently better than the federal government’s, and the balance is only a little higher than a year. typical net income. This liquidity provides the opportunity to return capital to shareholders or make key investments (i.e. Intel
INTC
THE ORACLE OF OMAHA
Granted, the forward C/E ratio of 23 and sub-1% dividend yield make it hard to call Apple a traditional value stock, but we can’t forget that the world’s most famous value investor owns a stake major in the business. Indeed, Warren Buffett’s Berkshire Hathaway
BRK.B
We therefore believe that Apple is both a growth stock and a value stock, a view we have more or less maintained since our initial recommendation in The cautious speculator over 22 years ago.
