Wednesday, December 16, 2015

Apple: It's all about the valuation

       Apple is now priced as if it is projected to have negative growth.  Using a discount rate of 9%, which is probably high, if Apple can maintain its current earnings, the value per share comes to $102.  But that ignores net cash.  Apple has net cash of about $26 per share.  That brings the total value to $128.  Not an Ichan like number, but still a good deal more than the market price of $110.  This implies that the market is predicting significant negative growth for Apple.  Admittedly Apple faces some challenges, but with good management it should be able to at least maintain current earnings.  It looks like Apple is now cheap.

Tuesday, December 15, 2015

Carl Ichan and Apple

       Too often the investment business mimics the entertainment business.  An issue becomes hot, it dominates the press for a short time, and then it is gone and everyone forgets it.  While that may be a fine strategy for think about movies, it is not a good one for analyzing investments.  If you don't follow up on your predictions and reassess your analyses, what is the point of doing the valuation analysis in the first place?

       Here is one example.  On May 18, 2015 Carl Ichan penned an open letter to Tim Cook on the valuation of Apple.  Ichan concluded, "With Apple’s shares trading for just $128.77 per share versus our valuation of $240 per share, now is the time for a much larger buyback."  Well, Apple bought back a bunch of shares and now it is trading at $110.  The question is where is Mr. Ichan?  Is he buying shares like crazy at $110?  Has he changed his mind?  Who knows.  Those questions are no longer fashionable.

Friday, December 11, 2015


     Suppose your neighbors have a fire sale and put their furniture on the market at extraordinarily low prices?  What you should do is buy all you can – not match their low prices.  We have reached that point in the case of oil.  For whatever complicated strategic or political reasons, countries like Russia, Saudi Arabia, Iran and many others are intent on selling oil at bargain basement prices.  Perhaps they are struggling to maintain a fixed level of revenue.  Whatever the reason for their actions, the rational response is to buy as much as possible.  American companies should leave their shale oil in the ground.  The world stock of reserves, as measured by British Petroleum, is only 40 times the world’s annual usage.  This means that eventually, though it may be a decade out, having large oil stocks will be valuable both economically and from the standpoint of national defense.  In fact, if the major producers today dump their stocks at bargain prices while American firms leave their oil in the ground, the US may be a leader of “OPEC” in the future.  Seen in this context, removing legal restrictions on exports of oil is the right thing to do from the standpoint of fairness, but will have little economic impact.  Why would American producers want to export when the current OPEC is flooding the world with cheap oil?  The wise thing to do is to cash in on the bargain by buying cheap oil now and then win again as the commodity becomes more scarce and the US stock becomes more precious.