Tuesday, August 13, 2013

Strange stock assessment from a value investor I kind of admire: a note on the transition of Apple into a "value stock"

In my email today I received a missive from a value investor I kind of admire - a peon to the value in Apple shares. To quote:

My mother-in-law had an Android tablet, and it quickly turned into an expensive paperweight on her kitchen counter.  Six months ago she got an iPad mini, and she is inseparable from it.  She won’t be buying another non-Apple phone or tablet.  There is a lot of bearishness on Apple in the media and blogosphere, but if these headlines start scaring you out of the stock, just visit a few Apple stores and your fears will all go away – the one we dropped in on recently in Denver was swarming with Apple fanatics, while the Microsoft store next door and the Samsung store at Best Buy were almost empty.  These folks will be buying whatever comes out of Cupertino for a long, long time.

Value investors must be the only people who assess tech stocks by what the grandmothers like. And they do it without any trace of irony.

Just like the classic Samsung advert but without the humour:




But of course my value friend does have a point. What with increasing longevity Apple will be here for a long time. I am not killing granny off yet - and the trail of some declining tech stock is clearly worth a lot of money.

What is Microsoft worth?





John

(No position in either stock - but generally I want to leave declining tech alone. Someone pitched me Blackberry the other day based on the qualities of their latest phone. You can make a pitch for Blackberry - but it is a patent-installed base pitch, not a pitch on the future...)

25 comments:

Anonymous said...

Where are the lurking pitfalls in this kind of analysis? Grandmother-approved value traps?

Generalmotors Gravytrain said...

The hedge fund managers have little good to say about Apple products. They're always claiming that Android products are just as good if not better. They say that the competition is just too much for Apple to make any headway in terms of growth. Once those hedge fund guys form a negative opinion about a company, that company is nothing but a plague to them.

tgma said...

I've tried both, and my personal preference is for Apple, and my personal experience is that people who are less technically minded prefer Apple products.
BUT no serious investor bases their analysis on this sort of anecdote - I've worked in funds that take this sort of airy-fairy approach, and my guess is that they soon trip up and lose their money.
Of course, the manager may just be summarising a lot of detailed work, for the benefit of a TV or newspaper audience, and talking their book at the same time. The problem is, people read it, and think that making this sort of superficial analysis is all you need to invest. But that is their problem, not this fund manager's.

Robert Czernkowski said...

Instead of peon (he he) I think tha you mean paean https://www.google.com.au/search?q=define+paean&ie=UTF-8&oe=UTF-8&hl=en&client=safari

Anonymous said...

Peon/Paean

Compare and contrast. I'd might go for the peon, myself.

"In my email today I received a missive from a value investor I kind of admire - a peon to the value in Apple shares."

Anonymous said...

paean <> peon

Anonymous said...

This gives an unfair trading advantage to those who have living grandparents. As not everyone is so fortunate, this should be regarded as inside information, and hence no one with a grandmother should be permitted to trade in tech stocks...

John Hempton said...

Peon -

I was thinking of the involuntary servitude that some value investors have to current cash flow metrics.

The word was deliberate - and a little bit of a dig -

Anonymous said...

I thought you were long MSFT some time ago (vaguelly remember some posts about MSFT you did championing their cause)?

The thing with Apple is that it's great for initial simple things. But iTunes is (IMO) one of the worst music management tools, and I regularly run into problems with my iPad (which I bought because the app I needed most wasn't on Android). I have a Mac laptop, but run Win7 on it and find it better (*gasp* and I dislike MSFT a lot... ).

The thing is, that from longevity perspective, todays geeks are tomorrow's grandads and Android ecology is much more exciting than Apples. I.e. it's much easier for someone to come up with something that shuffles you Android UI presentation than for someone to do the same for Apple. Of course, it's harder to find about it, which may make it irrelevant - but given that a lot of these are going to be bought not by grannies directly but by their kids/grandkids, who can immediately install the stuff on it, the question is how irrelevant it really will be in practice.

After all, Mac was more userfriendly to non-technies, but most grannies still have Win PC (even though Apple sells the most branded PCs IIRC). What does that tell you?

So, in the end, I'd bet that grannies will buy whatever their immediate social circle has. And that looks more and more like Android.



John Hempton said...

here is the public mind change on softy

http://brontecapital.blogspot.com.au/2012/07/changing-my-mind-on-microsoft.html

Kid Dynamite said...

as Peter Lynch used to say: "buy what your grandmother knows"...

;-)

Anonymous said...

How come AAPL is a value stock? Because of stock repurchase? dividends? cost base focus? what is the closest value comparable to AAPL?

AAPL is a speedboat with a leak on the gas tank and a hole in the keel. And AAPL will survive many more cycles.

They are the largest growth company. They are "racing" from product launch to product launch with single minded vision and a Plan, out-innovating competition on design/style, usability and feature use/release (albeit struggling at it more recently). A better experience and incredible buzz and marketing beyond HW and SW products they produce (which integrate neatly btw). They enjoy premium pricing and have faithful installed consumer base. So... the 'market' expects too much. Are there realistic growth rates and a cap for AAPL growth?

iTelly, iClock... iJustSaying,...
-BL

Matt Plomin said...

"Where are the lurking pitfalls in this kind of analysis? Grandmother-approved value traps?"

Following a luddite's preference would require you to prefer the proven over the possible, which is fairly analogous to value investing. The most obvious pitfall would be an increased likelihood that you would follow the buggy whip down into oblivion. In tech, think of those who adored Palm, then HP after the acquisition, but were blind to the threats from new entrants.

Anonymous said...

...also Oracle Larry is/was a hoot!!

C'mon John, for someone who knows their logical reasoning, Larry's bad omens are unfounded.

Best,
-BL

Anonymous said...

I'm not with you on this one Hempton.

AAPL occupies the same space now that Honda did in the mid-90s--they make quality, well built appliances that won't embarrass you. And they can, on some products, charge a premium price for it. It is a lucrative place to be.

The dividend is safe, there is a big buyback plan, and the shitty valuation gives you some cushion. I'm not an all-in type of speculator but I think you could do much much worse than having a significant portion of your portfolio in these shares.

Anonymous said...

Maybe you should ask Katsenelson about it? I'm bot sure if he is Long Apple...

John Clark said...

Went to a meeting at the Local Municipal Council with Lawyers - 6 people in the room ... 6 iPhones ...

Understand the killer profit stream is from iTunes, which Apple controls (and profits) really well.

Julius Davies said...

This reminds me of a story. My wife once attended a lecture in Japan by a former Panasonic executive. He said the company had launched its "National" branded portable cassette players. This was the same brand they used to sell rice cookers, washing machines, and refridgerators. On the train one day her overheard a pair of young women talking about the new portable cassette player one of them had acquired. The other one squealed in disgust when she realized it was a "National" and the other agreed --- this was the brand for dowdy housewives! The executive talked about the grief and shock and terror that completely overwhelmed his body in that moment. He pitched the CEO with the idea of a new brandname, but the CEO said he would only do it if George Lucas could be recruited to be in the ads announcing the new brand.

In his lecture he said he bought the same car as Lucas, the same golf clubs, the same watch, the same shoes, and so on, and just starting chatting him up on golf courses.

It worked!

http://www.japander.com/japander/lucas.htm

abee crombie said...

AAPL is a lot more than a tech stock

1) Probably the best low cost luxury brand

2) Its a product stock, not so much focused on tech innovation

and its got the money bags and the repuation to continue hiring smart silicon valley kids for a while.

Hey its hard to grow when you are AAPLs size but at 9x earnings a lot 'death' is priced in. One good new product and this thing is back above $600... longer term who knows. High margins worry me

dearieme said...

I've found that my wife's iMac has been an excellent device for watching the Test Match on.

Anonymous said...

John,
I too have been looking at Apple as a Value play, but there are still a few niggling issues holding me back.

I live in London and we've had an Apple store here for almost 10 years. In years gone by, you would have to scour the store to find employees to answer your questions or help with a product. In addition, the wait times for the genius bar appointments was often days.

Today, it's far easier to get help and easier to get a genius bar appointment. It doesn't look like there are more employees so they must have fewer people needing help. This is holding me back from really believing that Apple is becoming a good value play.

John.

Anonymous said...

John: AAPL is currently in a lull in its product cycle. Wait six weeks, presumably after the 5s is released, and see how things look.

Anonymous said...

Awesome observation and one that I appreciate, even as an annoyed iPad user. My 70 year old mother, however, loves her iPad. She takes pictures and videos of her grandkids with it (also very much appreciated), sends us e-mail and surfs the net. She's been doing that for more than a year. She couldn't put up with a PC laptop for more than a week.

BPL

WellRed said...

I am struggling to see how a supply chain guy will be able to follow in the footsteps of a product visionary.

Ronald Brak said...

I was given an iphone. It had many gigabytes of empty space on it. I thought it was really cool. After it was all set up I plugged it into my laptop and attempted to transfer a file onto it so I could physically transport that file to another location. It wouldn't let me do it. Using the internet I discovered it's only possible if I use a work around where I have to download a particular app which I did not do as I happened to own a $4 memory stick. Tried to work out why it would not come with that ability out of the box. My brain hurt. I cried a little. I have since used the iphone as a camera, but I don't trust it.

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