Why Apple Is A Core Manager’s Top Holding


At $390, Apple has dropped over 25% this year shaking the confidence of even the most ardent Apple shareholders. At times like these, I find that it helps to pay attention to managers who have made a lot of money in the stock because they generally have made the right decisions in the past after similar pull backs. When it comes to Apple, Eugene Groysman is the Marketocracy Master I look to.

Eugene runs a core portfolio for our clients in which he uses fundamental analysis to find companies in every sector that offer above average risk/reward profiles. This enables his portfolio to be diversified across sectors while avoiding the worst companies in each sector. Since May 9, 2003 — almost 10 years — his model portfolio has averaged 18.1% a year while the S&P 500 has averaged 7.4%.

Not only has Eugene done well overall, more importantly, he has done well with Apple. In October of 2010, he was buying Apple at about $245 because he thought the iPad could push the stock to $300. In November of 2011, when Apple was trading at $380, he told Forbes readers Apple Could Reach $500 In 2012. He’s been right about Apple more than once. Lets see what he thinks about the stock now.
Ken: Eugene, over the past few years, you’ve made a lot of money in Apple. But, in the most recent quarter, Apple’s stock has performed badly. I noticed you sold some early in the year when the stock was around $480. Why did you sell?

Eugene: I did sell Apple, but not because I still don’t see an upside. It had become extremely over weighted and it was causing major oscillations in the overall portfolio. As this was happening outside of my control, I decided I needed to reduce its impact on the overall portfolio.

Ken: What do you see that the market is missing?

Eugene: In my opinion the market misses a few big points on Apple. I looked at the stock from a quantitative and qualitative point of view.

From a quantitative point of view, the market ignores three very big facts about Apple.

It carries zero debt. For a company that size its incredible
Its return on equity (ROE) is about 38%
Its shareholder value is over $130billion.
Using a free cash flow model, the company could be worth over $1.4 trillion — over $1500/share.

On the qualitative side, none of the valuation takes into account new products being developed. On the horizon, you have the iTv, iWatch, and new variations on the iPhone. There is the 5s, and there is a lot of discussion of a cheaper version of the iPhone 5 that uses less expensive material that would have a lower price point. This option is being developed for possible launch with China Mobil (NYSE:CHL), the world’s largest cell carrier.

Ken: I take it you are bullish on Apple even after this quarter’s poor stock performance?

Eugene: I am still bullish on Apple and it is one my largest positions right now.

Ken: Thank you Eugene.

For additional investment insight and to converse directly with the Marketocracy Masters and the Warren Buffets Next Door, join Ken Kam’s group on LinkedIn or sign up for our free e-mail list.

Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.

Source: Forbes – Ken Kam, Contributor – April 21, 2013

Learn more about Ron Sloy.

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