Month: December 2022

Should I buy or sell Apple Stock?

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Quiz!

What is the impact of Apple’s share buybacks on its P/E, and should you adjust for it?

  1. The share buybacks lowered Apple’s P/E in the past 3 years. At this rate, Apple’s cash will be gone in less than 3 years. Since this is not sustainable, you should adjust for it.
  2. Apple is a highly profitable company with desirable products. Its profits should keep generating cash to support share buybacks for the long run. There is no need for adjustments.

Should I buy or sell Apple Stock?

Apple is a very successful company, with strong demand for their products.  As an investment, I see conflicting messages in their financials:

  1. The Price/Earnings (P/E) of 21 is not extremely high (https://www.macrotrends.net/stocks/charts/AAPL/apple/pe-ratio).
  2. The Price/Book (P/B) of 41 is stratospheric, about x20 higher than the average for the S&P 500 (https://www.macrotrends.net/stocks/charts/AAPL/apple/price-book).

The problem?  Apple did massive share buybacks, reducing its cash on hand by 55% within about 3 years (https://www.macrotrends.net/stocks/charts/AAPL/apple/cash-on-hand).  Share buybacks reduce the number of shares, increasing the earnings per share, and lowering the P/E.  At the current rate, Apple’s excess cash will go down to $0 in less than 3 years.  Assuming continued success, with no change in earnings growth, something has to give within the next 3 years: a drop in the stock price, or a big increase in the P/E, resolving some of the current anomaly.

The solution? You can estimate the annual impact of share buybacks on Apple’s P/E in the past 3 years, and adjust for it, as part of a full analysis of the stock. QAM focuses on value investing based on the more reliable, stable and thoroughly studied P/B, and diversifies stock portfolios into 1,000s of stocks.

Quiz Answer:

What is the impact of Apple’s share buybacks on its P/E, and should you adjust for it?

  1. The share buybacks lowered Apple’s P/E in the past 3 years. At this rate, Apple’s cash will be gone in less than 3 years. Since this is not sustainable, you should adjust for it. [Correct Answer]
  2. Apple is a highly profitable company with desirable products. Its profits should keep generating cash to support share buybacks for the long run. There is no need for adjustments.

Explanations:

  1. Please read this month’s article above for an explanation of this point.
  2. While Apple is profitable, a realistic valuation should reflect a sustainable future, including a stable level of cash. With cash dropping fast in recent years, an adjustment is needed.
Disclosures Including Backtested Performance Data

What Does a High Dollar Mean for US and non-US Investments?

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Quiz!

Since 1970, what was the impact on the 3-year return of US and non-US investments, when the dollar reached high levels like today?

  1. It helped the returns of US investments and hurt the returns of non-US investments.
  2. It hurt the returns of US investments and helped the returns of non-US investments.

What Does a High Dollar Mean for US and non-US Investments?

Recently, the dollar reached a very high level last seen in 2002 and 1986. What does this mean for US vs. non-US investments? Since 1970:

  1. Very high currencies suffered from a drag during the following 3-year returns
  2. Very low ones enjoyed a boost to the following 3-year returns.

While these past results don’t guarantee a repeat in the future, today’s conditions are encouraging for non-US investments relative to the US ones.

There are two explanations for this behavior when the dollar was unusually high:

  1. The low currencies increase the growth of non-US companies, by attracting US consumers, who get to buy more cheaply.
  2. The currencies increase back to fair value, increasing stock prices as measured in dollars.

Quiz Answer:

Since 1970, what was the impact on the 3-year return of US and non-US investments, when the dollar reached high levels like today?

  1. It helped the returns of US investments and hurt the returns of non-US investments.
  2. It hurt the returns of US investments and helped the returns of non-US investments. [Correct Answer]

Explanation: Please read the article above for an explanation.

Disclosures Including Backtested Performance Data