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Apple’s Stock Rally Shows a Long Reach

25 February 2015 in Trading Ideas

Earlier this week, shares of Apple closed at the highest point ever – yet another achievement by a company that has spent most of the last decade making history.

With a market cap of about $775 billion, Apple is now roughly twice the size of No. 2 ExxonMobil – another remarkable feat considering it was less than four years ago when the two companies were jockeying back and forth for the top spot.

Apple’s stock has already jumped more than 20% in 2015, and in turn, investments that hold Apple shares have also performed well.

Take, for instance, three motifs where Apple is a significant presence: Tablet Takeover, Mobile Internet Tsunami, and Wearable Tech.

Tablet Takeover (27.5% Apple weight) has risen 6.1% in the past month. In that same time, the S&P 500 has increased 3.1%. In the past 12 months, the motif has gained 38.1%; the S&P is up 16.5%.

The Mobile Internet Tsunami motif (16.1% Apple weight) has increased 4.5% in the past month and 21.9% in the last year.

The Wearable Tech motif (14.8% Apple weight) has gained 2.2% in the past month and 15.3% in the past 12 months.

Ironically, it may be a recent enthusiastic desire to reacquire Apple as an investment that has provided some of the recent boost. A barrons.com report on Monday noted that CNBC had discussed a Goldman Sachs report which noted that an increasing number of hedge funds, after missing the Apple ride in 2014, have been adding the stock to their top 10 holdings, with Apple on average representing 12% of their funds.1

Barrons.com posited that the stock was helped earlier this week by the company’s announcement that it is building two new data centers in Europe, in County Galway, Ireland, and in central Jutland in Denmark, at a cost of 1.7 billion euros. Apple said the new data centers will be powered completely by renewable energy.

The facilities will help it run its iTunes store and Apps Store, along with services such as Maps and iMessage.

It’s also worth noting that there was no shortage of bullishness surrounding the speculation that Apple is working on its own version of an electric car, even though there is no expectation such a product would be seen for years.

However, a recent bullish article in the print version of Barron’s over the weekend took a much more grounded approach – and also likely contributed to Apple’s new high on Monday.2

Writing in the magazine, Jack Hough called for the stock to return 25% over the next year, including dividends. Hough wrote that he expected a big dividend hike when the company updates its capital-return program, which he targeted likely in April. The current yield looks undersized at 1.5%, according to Hough.

Hough pointed out that Apple sits on cash and investments worth $30 a share, up from $18 a share back in September 2012. Net of this cash, the shares are cheaper than they appear, he wrote.

Apple’s free-cash generation – what Hough maintains matters in the long run for paying dividends, buying back shares, and investing in new gadgets and services – easily exceeds its earnings. Only part of the difference is explained by stock compensation reducing earnings but not free cash, he wrote.

“Apple whips through merchandise so quickly that it enjoys what’s called a negative cash-conversion cycle,” Hough wrote, “meaning it collects money from customers faster than it pays suppliers. That’s rare. Wall Street expects Apple’s free cash flow to total $10.17 a share this fiscal year, or 19% more than its earnings.”

Hough noted that while some may wonder how the company could continue to grow after the iPhone 6, earnings estimates on Apple’s distant quarters have been expanding higher.

Why’s that? Perhaps, Hough wrote, because only 15% of the company’s user base has upgraded to the 6; perhaps it’s because an Apple Watch could add 10% to fiscal 2016 profit, perhaps we’ll actually see a set-top box in the next year or two – and after that, a car.

Once again, Apple is in its comfortable place. Not having a piece of it has been increasingly difficult for investors to justify.

1Tiernan Ray, “Apple Closes at $133; Barron’s Bounce, Hedgies Buying Help,” barrons.com, Feb. 23, 2015.

2Jack Hough, “Apple Shares Could Return 25% in a Year,” barrons.com, Feb. 21, 2015.