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March, 2013


Only last September (9/21/12) Apple, Inc. (AAPL), the great Steve Jobs, Steve Wozniak, and Ronald Wayne founded technology company famously innovative as the creator of the Macintosh Computer, distinctive laptops, the iphone, ipad, etc., was selling for $705.07. Earlier this month (3/4/13), Apple was down to $419.00, and as of 3/20/13, it was still only back to $452.08 a share, 35.88% lower than just 6 months ago.

Why the big drop? As Sir Isaac Newton is said to have discovered back in the 1660s, when an apple falls it must be evidence of some serious gravity (or perhaps something gravely wrong), right? So is there a little amiss with this fruit company? Might there be a worm at its core? And since it comprises so much of the NASDAQ Index, sometimes over 10%, is it perhaps a bad Apple that might spoil the stock market barrel?

Adjusted for splits, AAPL has gone from $2.75 a share at its initial public offering, in December, 1980, to over $705 in September of last year, a compound annual return of over 19%. Even more impressive was its rise from a then recent low of $6.56, on 4/17/2003, to its September, 2012, high, an annual rate of gain of over 64%, and that does not take into account its dividends. Apple has thus been a growth company par excellence. Even after its decline from over $705, Apple's market capitalization exceeds that of many other large publicly traded companies combined.

With Steve Jobs deceased in late 2011, can AAPL continue its winning ways? Oddly enough, Apple now appears on two of my historically best performing equity screens. This might be a matter of comparing apples and oranges, though, for while Apple may no longer be a super growth asset, it could these days be an excellent Ben Graham type value bargain.

Apple's drop since last September seems likely due most to investor concerns over the personal computer industry being on the wane, liable to be replaced by tablets or other more portable digital devices, and Apple's competition in the smart phone niche, especially from Samsung. Yet smart phones, profitable as they have been for Apple heretofore, hardly encompass the majority of their technology offerings. Arguably, AAPL could lose all its smart phone business (not actually realistic, in my opinion, in the short- to medium-term) and continue to be profitable through its several other income streams. And Apple is on the leading edge of technologies that can replace PCs. It seems likely, however, that the demise of PCs is for the time being overstated. Businesses probably will continue to depend on desktop personal computing for years to come. In addition, software applications are a major source of profits for Apple, and can persistently give juicy returns even as the shape of the hardware changes.

Moreover, Apple has a horde of cash (over 9% of its share price) plus annual earnings which can be employed in raising its dividend, increasing research and development for new products, buying back its own depressed shares, or purchasing entire other companies (maybe Netflix or even Facebook), to swell its returns or head in new profit generating directions.

Further, AAPL has a low price to earnings ratio (trailing P/E about 10; forward P/E roughly 9), high return on equity (38%), essentially zero debt, and a dividend of about 2%, yet with a dividend payout ratio of only 0.12, so that the company could easily raise the dividend substantially without significant risk.

Apple is one of the strongest publicly traded business franchises, has among the highest financial strength ratings, and enjoys 3-5 year annual total return projections of well over 20%.

Would I then back up the truck to immediately buy all the shares I can of AAPL? No, for the market as a whole is just a bit frothy and may suffer some pull-back before going on to newer highs. Almost inevitably if there is a correction Apple's shares would go south as well. Besides, any one company can suffer unanticipated bad news which might cause investors further jitters. So, I have been and shall be a gradual purchaser, hoping for an average cost basis around or below its current price, but intend to have AAPL shares eventually be a significant part of our portfolio.

As always, I recommend that readers do their own due diligence and/or consult trusted financial consultants before making any investments.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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