Following the tech-heavy Nasdaq's pullback last week, featuring four consecutive trading days of negative returns, many investors may be planning to sell stocks and buy less risky assets like short-term treasury bonds. After all, T-bills with a year or less time horizon are currently yielding more than 5%. That's a compelling alternative to stocks.
While it always makes sense to have some cash, cash equivalents, and lower-risk investments in a portfolio, this may not be the time to double down on cash, despite the attractive yields in T-bills. Indeed, August's decline has already surfaced some great opportunities. Take Apple (AAPL 0.04%) stock, for instance. The iPhone maker's shares have pulled back 10%.
Though it's impossible to know when the bottom of any stock's pullback will be, one thing is clear: the decline has made the tech stock look compelling again.
NASDAQ: AAPL
Key Data Points
The simple case for long-term investors
Trading at about 30 times earnings, Apple shares may not look like a bargain. But they at least look reasonably attractive as a long-term investment.
Flipping the price-to-earnings metric upside down, you'll get earnings yield. Doing this quickly puts into perspective why stocks generally outperform T-bills over the long haul. Apple's earnings yield, which can be found by taking the company's trailing-12-month earnings per share of $5.98 divided by the current stock price of $174.49, is 3.4%. While this earnings yield is lower than the 5%-plus rates available in treasuries, there's a critical difference in this earnings yield relative to T-bill yields: Apple's business is a going concern, so it will generate earnings for decades. In addition, it's a going concern likely to grow over time. One-year T-bills, on the other hand, last only one year. Further, their coupons do not grow. And since bonds eventually mature, their capital must be regularly redeployed. And there's reinvestment risk when capital is deployed because no one knows what yields will be available at that point in the future.
Investors who buy Apple stock today, therefore, get access to:
- A solid earnings yield that could last decades.
- Long-term earnings growth potential
- A dividend.
For investors willing to hold for the long haul and endure volatility, these facets of Apple stock combine to make shares a better alternative to T-bills than it might appear at first glance.
Looking ahead
Sure, there's a lot more risk to owning individual stocks than there is to T-bills. Apple's earnings, for instance, could perform worse than anticipated, stagnating or even declining in the years ahead.
But recently Apple is giving investors good reasons to bet on the company, despite the risks involved in doing so. For instance, consider how the tech giant managed to grow earnings per share 5% year over year during its most recent quarter, even as it faced substantial foreign exchange headwinds and a difficult macroeconomic environment. Growing its bottom line in a market like this makes it seem unlikely that Apple won't be able to grow its earnings meaningfully over the next five to 10 years.
Further, it's worth emphasizing that analysts expect Apple's earnings to grow handsomely in the coming years. Earnings growth should help support long-term stock price appreciation. On average, analysts expect Apple's earnings per share in just four years to be about 50% higher than they are today. This is the power of compounding. This is why, despite the risks and the unavoidable volatility, it might make sense for long-term investors to load up on some Apple stock today.
