Sunday, April 21, 2013

Is this Fruit Prime for Plucking?

It is 11:40am at the Richmond airport. My 10:50 flight to Chicago has just disappeared into the hazy sky, full of passengers likely to be re-distributed all over the world. I sigh, repining from the woes of standby flight. I stand next to the charging station (I hate to sit in airports), and then something extraordinary happens: I think. While it is not uncommon for me to think in day-to-day activities, the realization quickly comes that I often view airports as an opportunity for a mental vacation. As I think about thinking, my brain wanders to a recent training session that I presented to some rising leaders in our company.

“True or False,” I asked. “As a leader in the company, I should organize my time so that I can accomplish multiple objectives at once.”

A smattering of hesitant responses rang out, but the general consensus was “true”.

My left eyebrow twitched as I tried in vain to keep it from rising, but it floated to the top of my forehead like a beach ball in the Dead Sea. “False,” I said. I repeated the word one more time and paused for a few seconds, hoping realization will sink in.

If I were in the Miss America pageant (they have yet to accept my application), my answer to the “what are you passionate about” question would be simple: effective utilization of time in airports. Seriously, think about how much more fit our country would be if we did one pushup for every minute we waited in an airport. Currently there are 24 people sitting in my vicinity. Out of those 24, two are playing angry birds, two are working on the computer (including myself), four are on tablets watching movies, three are browsing the web on their phones, one is reading on a Kindle, and twelve are staring off into space. If you are asking yourself, “did he creepily walk around and observe what all those people were doing?” you are correct. In 2012, airlines carried 812 million passengers to destinations worldwide. That's a lot of Angry Birds. At an average of two hours of time spent at the airport per passenger, enough hours are accumulated at airports each year to keep McDonald's worldwide operations running for a year and a half (over 400,000 employees).


Figure 1: 812MM passengers in 2012. Source: Bureau of Transportation Statistics T-100 Market data.

 Chart 1: The above chart is based on a sample size of 24, therefore the projected accuracy may be somewhat skewed.

A semi-applicable example, but I believe there is something to be said about specificity and driving one precise area (say, time spent in airports) to a goal at a time.  The squeaky wheel gets the grease; but if too many wheels are squeaking, you just wind up with a greasy mess.

Eat Your Fruits and Veggies:

If you read my previous post, you are probably wondering where I am going with all this. The truth is I don’t know. I never know. But you are reading this and historically it seems to work out alright, so I’ll keep typing.

How do you determine the health of a company? Today’s investors love to dive deep. There is a tendency to look at everything from supplier sales to dividend growth to China’s manufacturing index to determine if a stock is a good buy. Though there is nothing wrong with a full diagnostic sometimes it is notoriously easy to be steered to or from a company based on the fact that Big Mac sales in Luxembourg are down 0.7%. It is imperative to keep an eye on the vitals at all points in the decision-making process – so what are they?

Let’s look at a company that everyone is talking about – Apple (AAPL). Steve Jobs’ vision came to fruition throughout the 2000s after he took over the business as CEO in 1998. Following the crash in late 2008, Apple became the darling of Wall Street – constantly beating earnings projections while maintaining an air of mystery and excitement around their products. The stock price peaked in Sept. 2012 after a nearly flawless run to the top. It has since fallen over 40%.

Chart 2: Source -

Reduction in revenue growth and slowing demand for products are the major factors driving this chart downward. These are perfectly legitimate reasons to run away from a stock…in most situations. In most situations:
  • Companies that see growth similar to Apple’s are valued much higher than what their earnings are telling you. This is clear with companies like Amazon (AMZN), where the stock is currently valued at over 1000 times earnings. This is based on the assumption that the company will continue to grow. If growth were to stop or slow, there would be a lot of negative pressure on the stock because it was valued so highly. Apple has had an average valuation of 16x earnings over the past 5 years, so it has maintained a fair value all the way to the top.  
  •  Companies that see growth similar to Apple’s do not pay dividends. The profit margins are often much more slim for growth companies, so until they are firmly established a dividend is not an option. Apple was both firmly established and growing faster than the kill count in Rambo.
In addition to these situational factors, Apple currently has two secret weapons that investors seem to have forgotten: Brand and Cash.

First let's talk about brand. How did Apple succeed in making itself one of the most recognizable companies in the world? It was through perfecting one piece of the puzzle at a time. Apple hooked consumers with the iPod in 2001 and continued to develop this product ahead of the competition.Once they had earned the loyalty of the market, they moved on to personal computers, then to phones, then to tablets, growing their brand and consumer dedication. now rumors are swirling about an iTV or an iWatch. That excitement surrounding Apple products has yet to go away, and it has been three years (iPad) since Apple had a major charge into a new market.

When it comes to a company's piggy bank, "some cash" = good, "lots of cash" = better, "lots of cash and no debt" = nearly unheard of. Apple is in the latter category. With nearly $30 Billion in cash, the company merely needs to invest in a profitable acquisition to maintain growth.

 Figure 2: Comparison or Trailing Twelve Months (TTM) figures for AAPL, GOOG, MSFT, and INTC. Source -

Now is a great time to buy Apple at a discount, as it seems that most investors are losing focus on the vitals of the company. The fundamentals are still very strong and this is not a company that will turtle-shell and let others charge the market. I maintain that Apple still has room to run - simply based on the simple things.

Disclosure: I own shares of AAPL.

Next Post: Choosing a winner in different industries. 


  1. Disclosure: Today I ate an AAPL. Great blog post, Robert.

  2. I installed an AAPL network in 1988 for a music publishing company in Nashville, TN (Green Hills). I thought that was amazing - 8 or 9 Macintosh SE personal computers with 8MHz processors and 20MB hard drives for a little under 4K each! All daisy-chained together with network cables.

    iPads, iPhones, and such were science fiction. I wish I had bought some AAPL then at < $40 a share!

    Thanks for the great posts, Robert! You do a great job of making a technical subject actually interesting (and understandable)!

    Disclosure: I almost always put PB on my AAPL...