Nasdaq Rises In Mixed Stock Market; When Is It Time To Buy Apple Again?

I was pleased when Mike reached out to me about the second edition of the #1 Stock in the World. Admittedly, my original pick of The Walt Disney Company (DIS) has been a bit of a dud. As shown in Mike's recent re-visitation of the original piece, DIS is only up a few percent since the project began in 2016. This is pretty abysmal performance relative to the market that is rocketed up nearly 40% since then. It's a bit odd for me to focus just on one stock being that I manage a very broad portfolio of 70 positions or so; however, I'm happy to have the opportunity to redeem myself a bit as a single stock picker.

When sitting down to think about my answer to the question, "if you had $25,000 to put into only one stock for a decade" this go around, I considered sticking to my guns and going with Disney again. If I liked DIS a few years ago when it was trading for ~20x earnings, then I must love it with a 15x multiple, representing a 25% discount, right? Well, yes and no.

Theoretically, the cheaper valuation should bolster my returns assuming earnings growth continues as expected and the market corrects its valuation folly and multiples expand. I still own quite a few Disney shares, and I believe in this company long term, but the data doesn't lie, and the stock's performance makes it clear that I totally underestimated the cord-cutting trend. DIS faces a lot of unknowns regarding its ability to create a competitive OTT platform to repair the damages that the cord-cutting exodus has done to the traditional cable media model. I have faith that Iger and Co. can get this right; however, I acknowledge the question marks still hanging above DIS's head, and because of these, I'm not willing to make it my one and only pick in the theoretical scenario laid out by Mike's panel project.

So, when thinking about the one company that I feel most comfortable buying and holding blindly, I'll cut to the chase. The answer was clear: Apple (AAPL).

AAPL is the largest individual holding in my portfolio and, therefore, it's my choice for this series. Due to my relatively young age, I manage my personal portfolio with a multi-decade time horizon. I don't have the blind buy and hold restraints put on my trades in reality that Mike's project puts on panelists in this series; however, when it comes to the core positions within my portfolio, I have no plans to sell anyway, so I suppose the situation isn't all that different. I wholeheartedly hope that I'm still holding on to all of the Apple shares that I own today in a decade or two. My hope is that they continue to be a strong anchor for my portfolio, in terms of steady operational success and continued generous and reliable shareholder returns.

I did consider a variety of other names when sitting down to think about this project. If this was true competition with some sort of fashionable reward (other than bragging rights amongst the SA contributors), I probably would have named a stock like Snapchat (SNAP) or an asset like bitcoin, swinging for the fences, as they say. I don't necessarily believe that either of these potential investments are very good ones, but I do acknowledge strong upside potential and really the only way to "win" a competition like this is to make contrarian picks. I wouldn't be surprised in the least if Apple continued to beat the broader market over the coming decade as it has in the past; however, I would be very surprised if it was the absolute best performer in the market. AAPL is nearing a $1 trillion market cap in the present, and while I think it could easily continue to grow, I don't expect it to be a 10-bagger. In reality, though, it's highly unlikely that I would ever invest my hard earned money into a stock like SNAP or a highly speculative asset like bitcoin, so it would be disingenuous for me to make a pick like that in a contest like this.

I also thought about going with other speculative, yet slightly lower risk names like Amazon (AMZN), Alibaba (BABA), or NVIDIA (NVDA), focusing more on growth than value or income, but that pick wouldn't have rung true either. I thought about Visa (V) and Mastercard (MA) in the digital payment space due to their growth growth/dividend growth prospects. I thought about Microsoft (MSFT), Facebook (FB), and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), which all offer great growth prospects in the tech space with fairly reasonable multiples on their shares. I own all of these names, alongside a handful of other speculative companies within the high growth basket that makes up ~20% of my overall portfolio. Over a 10-year period, I wouldn't be surprised if names like these ended up beating Apple's performance over the coming decade. With that being said, I also wouldn't be surprised if any one of them experienced issues, especially regarding a re-rating of their equity by the market which could lead to underperformance as multiples contract.

This is the risk one runs when investing in high growth names. The transition from a high growth stock to a more value oriented one is rarely a fun one for shareholders. I've held Starbucks (SBUX) for years now, and I'm understanding the frustration of long-term consolidation (or more simply put, sideways movement) as multiples contract to make more sense relative to earnings growth. I don't necessarily believe that AMZN, BABA, NVDA, etc, is headed for a major top-line slowdown in the near future, but if I could only own one name, I wouldn't be able to sleep well at night knowing the potential risks I faced. Apple makes up ~8.5% of my portfolio on its own because I think that this company has the potential to outperform as well, though with substantially less risk.

I was a bit uncomfortable naming a company currently trading at all-time highs. If this panel was talking about the single best investment to make looking only a year out, instead of a decade, I likely would have done a different direction (Johnson & Johnson (JNJ), for instance, which is trading at multi-year lows in terms of valuation while still offering a strong yield and reliable growth). However, a decade is a long time, and assuming that AAPL continues to grow like I expect for it to, today's valuation will mean very little 10 years from now. What's more, when you subtract cash from the share price, AAPL is trading at ~10x earnings, which is still quite attractive, even at all-time highs.

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>Source: F.A.S.T. Graphs

As you can see on the F.A.S.T. Graph above, AAPL is currently trading with its highest valuation since 2008. For years, AAPL has traded with a sub-market multiple, making my decision to build a massive (well, massive for me, anyway) stake in the company an easy one. Where else could I find reliable growth, strong dividend growth, one of the best brands in the world, and one of the best balance sheets in the world trading without a premium multiple? Well, now this the rise of high margin, reoccurring (predictable) services revenues, that trend might be changing. I'm perfectly okay with that, because for years, I've felt that AAPL was being undervalued by the market. However, even though I believe this company should trade with a ~20x multiple, I acknowledge that the margin of safety is much thinner today than it has been at just about any other point in time during the past decade. However, as stated above, that might not matter much at the end of the next decade if AAPL is able to continue to compound its bottom line at a ~10-15% annual clip.

At the end of the day, I suspect that Apple will continue to post solid growth over the next decade while continuing to return hundreds of billions of dollars to its shareholders. I wouldn't be surprised if AAPL's annual dividend in 2028 is nearly $8.00 a share (representing a yield on cost of over 4% at current prices). I also wouldn't be surprised if the company reduces its outstanding share count by 30-40% over the coming decade. Both of these educated guesses are based upon the company's established cash flow growth and shareholder return metrics. Even if AAPL doesn't average double-digit annual top-line growth over the next decade, it's hard to lose when you're receiving such generous rewards as a shareholder.

Source : https://seekingalpha.com/article/4182620-1-stock-world-apple

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