Why Apple Belongs at $400 Instead of $300

With Apple being up over 200% the past 2 years, it's easy to say that this stock's run is over, but I don't think that's the case. Apple's most recent earnings report showed an acceleration in growth, and the stock is not currently reflecting that. My $400 price has some assumptions, but I still believe they are likely conservative.

First, I think Apple could easily earn 5.75 EPS in their Q1 report as Apple reported 4.64 in Q4. That's a 24% sequential increase in earnings during their strongest quarter fueled by the Holiday season. Apple has seen a larger sequential increases than this, and did not have the product lineup they have now. You may argue that Apple only guided for 4.80 EPS in Q1, but Apple is known to sandbag, and their Q4 estimate of earning 3.44 EPS estimate was clear evidence of this. Apple earned 34% more in Q4 than they guided the markets. Apply that to their Q1 guidance and you get 6.43 EPS. I think 5.75 EPS is clearly conservative even with potentially lower margins.

If we assume Apple does greater than 5.75 EPS in Q1, then the rest becomes basic math. For Q2 it's safe to assume a 15% drop in EPS vs Q1, which is likely overly pessimistic. For Q3 and Q4 I would expect at least 7.5% and 12.5% sequential growth respectively. This assumes an iPad refresh, small tweaks to the iPhone, and a pickup in growth in Q4 due to school shopping. This doesn't even include the positive impact of Verizon picking up the iPhone or any new product launches Apple has up its sleeve. This leaves us with:

Q1 2011 - 5.75
Q2 2011 - 4.89
Q3 2011 - 5.25
Q4 2011 - 5.90
FY 2011 - 21.79 vs FY 2010 15.15           =          44% yoy EPS Growth

Once analysts realize Apple will do greater than 20 EPS for 2011, $400 is not unrealistic at all and I believe Apple could hit this as early as late January 2011. That would leave Apple under a 20 forward p/e with 33-50% EPS growth. This doesn't even include the mountain of cash Apple has which is already around $56 a share or 51 billion.

There are risks to these assumptions such has margin compression, slowdown in the economy, slowdown in the PC market, etc. But I don't think these issues will manifest in the short term. I would be buying the stock here and I personally added a small position of calls to my long position.

Some Advice for New or Young Stock Pickers

After watching Citrix Systems and VMware drop 14% and 9% respectively, I thought would give some advice for newer or young stock pickers. Investing in individual stocks is a lot different than throwing money into your 401k, mutual fund or ETF. Many mutual funds and ETFs come with some sort of prepackaged diversification, shielding you from the volatile movements of specific stocks.

When I first started investing in individual stocks, I went towards what I knew and this was technology. I was almost 100% technology at the time and the movements were extremely volatile. Over time I have adjusted my portfolio to where I am much more balanced with Coke (KO), Kraft (KFT), and Johnson & Johnson (JNJ) being some of my largest holdings. Not only are the returns still good, but its helped cushion the blow of some of the more volatile days in the market.

I know a lot of young investors are given advice to take on risk because they're young. They can make up losses over time. But a loss is a loss, and as people drift into high fliers or momentum stocks, losses can pour in a lot quicker. Would you have sold VMware today when it dropped 9%? What happens if VMware continues to drop? These are very important questions that need to be asked BEFORE starting your position.

STEC was one of those stocks a lot of people chased in 2009 that had a lot of good momentum going. STEC sells solid state disks to companies like EMC. These hard drives are much faster than typical drives seen in a personal computer, and STEC saw a large spike in orders in 2009. It was a highly visible stock, and not too hard to understand their product.

In late 2009, the company reported a slowdown in orders. The stock fell and it didn't stop. Chasing that stock burned a lot of investors, and a lot didn't get out early enough. STEC was a highly speculative stock and had been priced on extremely high growth rates. Once investors realized those growth rates had stalled, and even reversed, the stock saw a major correction. You may feel the stock has nowhere to go but up. But a stock that goes up fast will fall just as fast if the company doesn't deliver.

I would recommend new or young stock pickers to start slow and be patient. You may be able to lose money, but those losses can add up over time. Even the smallest of losses will make it that much harder to get back to even. Take a look at my article on long-term investing, and you'll see that you don't even need momentum stocks to beat the market.

This is not a knock on Citrix or VMware as they have had incredible returns for the year, and are very well run companies with strong fundamentals behind them. Just make sure you don't have all your eggs in one basket, and be prepared to adapt quickly if those fundamentals change. The movements in Citrix and VMware today are examples of how quickly things can change for stocks that have had a great run.

Putting Things Into Perspective

Wells Fargo (WFC) had a book value of $13.58 and the market felt the stock was worth over $35 at the end of 2006.

Wells Fargo now has a book value of $21.35 and the market believes the stock is worth less than $24. Is the market right and Wells is really worth $24 or was it actually wrong in 2006 and now?

I am aggressively buying Wells Fargo at these prices.

More Reasons to be Bullish on Stocks

A great article from Doug Kass that describes why it's time to be bullish on stocks:

Kass: The Scale Tips to the Bullish Side

Some standout information from Kass:

"In a Friday conference call, JPMorgan's Tom Lee observed that the performance between bonds and stocks over the past 10 years has never been as wide in any decade in history. Whenever stocks have a negative 10-year gap in performance relative to fixed income, the average yearly return in the following decade is approximately 13%."

"Risk premiums (the difference between the earnings yield of the S&P index and the 10-year U.S. note) is at the highest level since the beginning of the modern era's bull market that began in the early 1980s."

Time to Start Being Greedy

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” - Warren Buffett

The economy continues to face headwinds, but after a 15%+ drop in the market, it's beginning to look undervalued. As people pile into 10-year note causing its yields to reach levels not seen since the Lehman Brothers collapse, the S&P 500 is now trading at only 11.5x 2011 estimates. The market could continue to drop as pessimism reigns, but I would start accumulating quality names like Coke, Kraft, Google, Microsoft, Apple, GE, Nike, Wells Fargo, etc as these stocks reach valuation levels below the doldrums of 2008 and 2009.

I believe Oracle gave the market a good sign last week that while there are definitely problems in the global economy, companies will continue to show growth albeit at a slower pace. This is in contrast to the market being priced at a 25% discount to 2011 S&P500 expected earnings and 10-year note yields at depression-like levels. 

It's time to start being greedy.

Instant Gratification

With the wild swings in the market lately, and the constant mention that long-term investing is dead, I thought this article from Doug Kass summarizes things pretty well.

Kass: How Are You Doing This Month?

Is Long-Term Investing Dead?

When the market sees pullbacks like the one we've seen recently and the more drastic move back in early 2009, there's always a crowd insisting that long-term investing is dead. We are told that no stock is safe, and the drops we've seen prove it. In reality, the market is going to be volatile and constantly fluctuate. Long-term investing is in no way dead, and it all depends on what stocks you pick.

VMware (VMW) is a stock that has been on a tear lately as companies look to cut costs and improve efficiency in their IT environment. Is this a stock you can buy and forget about? Probably not. While VMware has great technology, high growth rates, and a leadership position in the virtualization market, technology is a rapidly changing business. VMware has two major competitors in Citrix and Microsoft and has risks to growth and margins. However, that doesn't mean VMware isn't worth buying. It's just not safe enough to throw a lot of money at and forget about. VMware is just an example of many great stocks that likely carry too much risk to buy and hold.

So what stocks are worth holding long-term? Warren Buffett has a great philosophy on investing and is probably one of the more well known long-term investors. He looks at companies that have strong moats and strong brands. These could be perceived as boring stocks, but with a little patience, you could end up doing better than you think.

Two notable stocks in the chart above are Nike (NKE) in the blue, and Procter & Gamble (PG) in dark green. Excluding dividends, Nike is up almost 250% and Procter and Gamble is up almost 100% over the past ten years. Dividends just make those gains even sweeter. This all happened while the S&P 500 (in red) did basically nothing over the past ten years. Nike is an well known brand which lets them sell shoes at higher profit margins. They are directly linked to growth in emerging markets. Procter & Gamble sells consumer products that people consistently need. Procter is also seeing growth in emerging markets. Other stocks shown on the chart above are Coca-Cola (KO), Johnson & Johnson (JNJ), Wells Fargo (WFC), and J.P. Morgan (JPM). All of these have performed better than the S&P 500 over the past ten years.

These stocks may be considered boring or simple, but they are an example that long-term investing isn't dead. A $10,000 investment in Nike (NKE) ten years ago would be worth around $25,000 now. A lot of people give advice to buy ETFs because you get access to a broad spectrum of stocks which instantly diversifies you.  But an investment in the S&P 500 ETF (SPY) lagged all six of these basic and boring stocks. Long-term investing isn't dead as long as you pick the right companies.

Are We Asking the Right Questions?

Meredith Whitney shows up on CNBC and it isn't a surprise when she spreads her doom and gloom. While she may end up being correct and her predictions become 100% true, I don't think anyone is asking her the right questions.



We know what she is going to say. She's been saying it for the past four years. The past 12-18 months have actually been good for banks while she continues to have sell and hold ratings across the board. She hasn't been right lately, and who knows, she may be right in the future. The question no one is asking is: "what will it take for you to become a bull on financials, Meredith?"

I think this is an extremely important question to ask someone who has been a long time bull or bear because you learn more about the person's thinking than anything else. CNBC won't ask this question, because with the Europe debt problems, Meredith is on TV to throw some more fear into the mix. If she begins to rattle off a huge list of things she needs to become bullish, then we're likely dealing with someone who will never change their mind.

In reality, banks are doing okay and have some positive trends going for them. Almost 0% interest rates and much stronger balance sheets just to name a few. However, there are still risks out there and things can change rapidly. Ultimately, I think you're going to get better advice from someone who considers both sides of the equation. And I don't believe that's what Meredith is offering.

http://www.cnbc.com/id/37195213