2 Misunderstandings Regarding Apple's $14 Billion Share Repurchase

Don't believe the critics -- Apple is creating value with its latest share repurchases

Feb 7, 2014 at 8:28PM

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.

Another up day for stocks, with the benchmark S&P 500 index and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) rising 1.3% and 1.1%, respectively on Friday. According to Bespoke Investment Group, this marks the first back-to-back 1%+ up days since Jan. 2, 2013. If nothing else, this illustrates the fact that, despite a big run-up in the stock market, volatility was subdued in 2013, and we may be witnessing some sort of return to normalcy in that regard. Shares of Apple (NASDAQ:AAPL) outperformed (slightly), up 1.4% (see main story, below the picture).


In an interview with the Wall Street Journal, published on Thursday evening, Apple CEO Tim cook revealed that the company has repurchased $14 billion worth of its own shares in the two weeks since its disappointing fiscal fourth-quarter earnings report on Jan. 27. (The stock fell 8% the next day, its second largest daily drop.)

As I pointed out this morning, if you believe the shares are significantly undervalued at or below current prices, then this is excellent news for Apple investors. Unfortunately, buybacks are not well understood in the financial media; here are two misinterpretations of Apple's action found in the media coverage so far.

Apple was trying to support the stock price with its repurchases
There is no evidence to suggest this is the case. The interview in the Wall Street Journal [sign-up may be required] suggests that Tim Cook was unconcerned about the fact that the stock dropped near $500 after its Jan. 27 earnings announcement other than to observe that it was an overreaction on the part of the market, and that the shares now presented better value than they had at $550. There is a fundamental difference between ramping up share repurchases because one believes they offer better value, and defending a specific price level.

Indeed, Mr. Cook reaffirmed his long-term orientation, stating that he wants to "be able to adjust for the long-term interest of the shareholders, not for the short-term shareholder, not for the day trader." If he were worrying about the stock price on a day-to-day basis, he would be doing long-term shareholders a grave disservice – that's not a good use of his time and mental resources.

This latest round of repurchases has no lasting impact
This criticism is premised on the notion presented above that Apple accelerated its purchases in order to try to give the stock a "boost." The only question that Apple shareholders need to be asking themselves right now is whether or not the stock is significantly undervalued (as Carl Icahn believes). If it is, then, in the words of Berkshire Hathaway CEO Warren Buffett, "no alternative action can benefit shareholders as surely as repurchases."

Far from being fleeting, then, repurchases that meet that condition have lasting impact on per-share intrinsic value. Managements do not control the stock price, but a well-executed share buyback is a direct lever to increase a stock's intrinsic value – that's what they ought to aim for and that is a rational basis on which to assess them. On that score, I have Tim Cook doing a superlative job; Apple shareholders can feel very good about his stewardship.

Better than Apple: The one stock you must own for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information