While 2022 is marked with red ink for the majority of stocks, it’s been a good year for those of the Value persuasion, relatively speaking. Indeed, as of 12.07.22. the Russell 3000 Value index had a negative total return of 7.1% year-to-date vs. the 26.3% plunge for its Growth counterpart, the Russell 3000 Growth Index.

Proponents of Value investing have welcomed the turning tide, which began on Halloween 2020, as the approach had been maligned in recent years. Of course, historical experience favors the style over the long term as well as in periods like the current one that has prominently featured rising interest rates & inflation, a subject covered in a recent report my team has penned.

The Prudent Speculator SPECIAL REPORT: Inflation 101B

GROWTH IS A COMPONENT OF VALUE

In my two most recent posts, I’ve generally argued that two MegaCap tech stocks, Microsoft

MSFT
& Alphabet (GOOG) should be considered by investors who lean toward the Value side of the investing aisle. Of course, such discourse would surely be lacking without including Apple

AAPL
in the conversation.

After all, the consumer electronics giant was the first American business to reach a staggering $1 trillion of market capitalization, before going on to cross the $2 trillion threshold in August 2020. To be sure, Apple is a grower, having doubled earnings per share since 2018 (a rate of nearly 19% per annum) and tripled the figure since 2016 (20% growth per year), quite the feat for a company of its massive size.

In recent years, AAPL shares have been rewarded with a multiple of earnings above that of the overall market. But there is plenty of value to be realized from the firm’s ever-evolving product base that goes hand in hand with its ubiquitous ecosystem.

Of course, as mentioned in my features of Microsoft and Alphabet there is much more to choosing an attractively priced stock with handsome appreciation potential than a few valuation metrics. Indeed, we at The Prudent Speculator have long argued that growth is a component of the assessment of the investment merits of any company. In fact, our three-to-five-year target prices always consider forward-looking expectations for sales and earnings, not to mention brand strength, competitive position, product breadth and depth, and management prowess.

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For additional contemplation of the subject, check out our Special Report: Don’t Forget About Value

DOMINATING THE HEADLINES

Although AAPL is mostly known for its consumer products that “just work”, its ecosystem serves as a sort of walled garden around its entire product line, which enhances the interoperability of devices and broadens the appeal of its additional services like music and television. Apple now boasts over 900 million subscribers across these services.

Of course, there was a recent kerfuffle about Apple’s command of its App Store related to the company’s 30% revenue cut and the potential to kick Twitter out of the store, but CEO Tim Cook and Twitter owner Elon Musk seem to have found common ground and settled their disagreement.

Also, there have been several unnamed sources in the news citing supply constraints as reason for the company to cut iPhone production. However, while these checks can sometimes be the equivalent of a canary in the coal mine, Apple has many suppliers, which can see orders whacked for reasons outside of demand (e.g. low quality and delays). Of course, we’ve also seen Apple production cutback rumors turn out to be false.

We might add in this case that the Chinese government is feeling rising pressure to abandon its zero-COVID policy, which has put Beijing in a lose-lose scenario. For the rest of the world, it should mean that constraints will ease, even as companies have been looking to diversify production to regions outside of China.

No doubt, the product upgrade cycle for iPhone will reach an equilibrium, at which point there will be stabilization of demand from existing iPhone users. Nevertheless, growth in subscription services should reduce volatility associated with product refresh cycles. In addition, the services segment produces a gross margin nearly double those of the products (iPhone, Apple Watch, etc.), which are impressive in their own right (usually between 30%-40%).

Apple’s balance sheet is also very strong, with a large cash hoard that is significant enough on its own to rank among the top 15% largest S&P 500 companies by market value. The debt burden has also grown over the years, but (perhaps unsurprisingly) Apple’s credit terms are presently better than those of the Federal Government, and the balance is merely a touch higher than a typical year of net income. This liquidity offers flexibility to return capital to shareholders or make key investments (i.e. Intel’s
INTC
smartphone-modem chip acquisition).

THE ORACLE OF OMAHA

True, the forward P/E ratio of 23 and dividend yield below 1% makes it tough to call Apple a traditional Value stock, but we can’t forget that the world’s most famous Value investor owns a major stake in the company. Indeed, Warren Buffett’s Berkshire Hathaway
BRK.B
held $126.5 billion worth of AAPL shares at the end of September!

So, we think Apple is both a Growth and a Value stock, a view we have maintained more or less since our original recommendation in The Prudent Speculator more than 22 years ago.

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