1 Reason to Ignore the Market on Apple

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The current month of September appears to be firmly intent on challenging its historical record with regard to stocks, with yet another up day in the books -- the seventh in a row. That's right, stocks have so far risen every day this month. Today, the S&P 500 (SNPINDEX: ^GSPC  ) added another .3%, while the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) was up 0.9%.

With that winning streak in mind, it's not surprising that the CBOE Volatility Index (VOLATILITYINDICES: ^VIX  ) fell another 4.9% today, to close at 13.82 -- the VIX, Wall Street's "fear index," is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days. The VIX has now fallen nearly 19% since the beginning of the month.

Carl Icahn's case for Apple
Yesterday, I highlighted investors' dissatisfaction with Apple's (NASDAQ: AAPL  ) premium pricing strategy for the lower-end model iPhone 5C it released yesterday. That process continued to play out today, with the shares declining another 5.4%, adding to yesterday's 2.3% loss.

One highly astute market participant who was unfazed by the decline is billionaire activist investor Carl Icahn, who told CNBC today:

I really think Apple is one of my best right now. At these levels, we're buying quite a bit of stock... We bought quite a bit today in the $465, $470, $467 range, $466... That's not to say it won't go any lower -- I don't really look at it from day-to-day and we don't try to fix what the market is going to do. I think if they do a big buyback, that's going to be a major plus, but I also think the products are pretty good and I think they're going to get a lot of business from China and they're going to do great anyway. You don't see companies like this with this kind of brand.

Back on August 13, Icahn tweeted that he had amassed had a large position in Apple and believed the company "to be extremely undervalued." Today, he made the case for the stock succinctly:

We look at the markets and look for no-brainers and I think Apple is just a no-brainer. It's extremely cheap -- you just look at the numbers on Apple and if you back out cash, you're really paying less than $300 billion for Apple and its EBIT [Earnings Before Interest and Taxes, a measure of cash flow] is about $50 billion, so your return is 18% or 5.6 times. But the real kicker is that if they do a huge buyback -- not even huge, $150 billion -- you're only paying three times EBIT, you're getting the 33% return. With those numbers in a company that is growing and has a great brand -- if somebody offered you that and didn't tell you the name of it, you'd pay 'em to tell you what the company was.

As far as the pricing of the new iPhone models is concerned, Icahn isn't giving it a second thought:

I will tell you, at the risk of being immodest, that we have one of the best records around over the last decade, over the last year. I will tell you this: I've learned one thing: Don't micromanage. Don't go in and tell somebody else how to run their business. I look at it from the big picture: We go into companies and we tell them how to run their finances, we tell them how to buy pencils instead of buying from their cousin Vinnie, for example. But we don't tell them what to do in this situation...

I would be the most presumptuous person in the world to sit there and tell them they shouldn't price it this way. I just look at what they're doing: They have one of the best brands, they are building revenue... I think Tim Cook is doing a very good job... Don't tell the CEO who spends 20 hours a day, hopefully, doing his job and has been doing it for thirty years, "Hey, you shouldn't go into China" or "You should..." -- that's the height of presumption.

Icahn's case for Apple may not be sufficient justification to go out and buy the stock immediately, but, given his track record, it's certainly reason enough for value hounds to prick up their ears and begin sniffing around the shares.

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Read/Post Comments (10) | Recommend This Article (14)

Comments from our Foolish Readers

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  • Report this Comment On September 11, 2013, at 9:03 PM, applefan1 wrote:

    What people are missing about this low cost phone market is that it doesn't make any money. Anyone that thinks that Apple should go after the low cost market doesn't understand that that would be damaging to the Apple brand and it would cheapen the rest of their products.

    Why do you think Mercedes stays out of the $20K and less car market? Not enough profits per car and in order to go after that market and maintain decent profit margins, they would have to make a cheap car and that would damage the Mercedes Benz brand. Sure, we'd all like to have a Mercedes or some other premium car, but there is a reason why they are more expensive. It's called better quality of parts, support, ongoing development of s/w. These other brands that sell cheap phones, they don't have the same quality of support, they don't do anything in terms of developing or updating a quality OS, software apps or ensuring the phone is a quality product. Instead, these cheap phones are nothing but throw away and you'll probably end up having to buy them every year or two because they cheap POS.

    I think Apple has the right strategy, its just some of these journalists are just dumber that stump thinking that market share is everything. Market share doesn't pay the bills, profits do. Apple has to maintain profit margins to continue to reinvest in the company, grow the company, and return some of the profits to the shareholders.

  • Report this Comment On September 11, 2013, at 9:29 PM, willinginvestor wrote:

    Well said. Thank you.

  • Report this Comment On September 11, 2013, at 10:02 PM, Oril wrote:

    You don't look at it day to day. Really?

    You obviously looked at it today and then spent quite a bit of time writing BS to support your position. Worried?

  • Report this Comment On September 12, 2013, at 2:09 AM, canuksteve wrote:

    Why are there so many Apple bears out there? Is it because they want to have Apple quality at Samsung POS prices? I used to have a Samsung I hated it, I moved to Apple 5 and I'm no longer frustrated and tempted to smash my phone into the sidewalk. You get what you pay for. Thank heaven there is a company out there you can rely on.

  • Report this Comment On September 12, 2013, at 7:41 AM, jdmeck wrote:

    I can give you three. figerprint tech, motion tech and A7. Just wait until the migration. Most Wall Street types have no clue. They should listen to Warren and stay away from what they don't understand.

  • Report this Comment On September 12, 2013, at 9:58 AM, Morgana wrote:

    Applefan1--EXACTLY RIGHT.

  • Report this Comment On September 12, 2013, at 12:31 PM, Hoptopia wrote:

    Must be nice to be Carl... oh we picked up 100K shares at 465 today... and his balance sheet didn't even notice.

  • Report this Comment On September 12, 2013, at 12:56 PM, Mathman6577 wrote:

    Applefan1 said it well (maybe he works for Apple :) ). Apple will not lower their standards to try to beat Samsung in the low tier of the market. They will continue to make a good product that people love. They want to add more users to their ecosystem so they keep upgrading their devices and buy related products (like iPad and Macs). In the meantime the cash keeps rolling in day after day. My advice is to ignore the analysts -- they do not understand the product at all.

    Canuksteve: I agree with you 100%. I used to own a few Samsung products (not smartphones) and they were terrible. All failed within the first year of operation (I think that is their design life). Apple makes the best out there whatever they do.

  • Report this Comment On September 12, 2013, at 10:04 PM, Gtbanamerican wrote:

    Sometimes it just seems that people just hate to see someone (company) be successful.

    Quality is worth every penny, sorry, I mean dollar!

    I've had Sony and IBM and other brand named products that fail, are not compatible with so many operating systems and had terrible third party warranties.

    Apple products FIT TOGETHER! They work and should you have a problem, go see a Genius, for FREE and get a fix.

  • Report this Comment On September 13, 2013, at 8:36 AM, marichel wrote:

    All the talk has been about selling the new IPhone C in Asia. That's funny because several parents I know have told me that they can know afford to buy them for their younger kids.

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