Apple Looks Like A Better Buy Than The Market

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 |  Includes: AAPL, CHL, FB, GOOG, SPY
by: Zvi Bar

Summary

Apple underperformed the S&P 500 in 2012 and 2013 and this trend is likely to reverse.

Apple has a sizable cash position, which will be an increasingly attractive characteristic if the market declines further and investors seek out more conservative allocations.

Apple will likely increase its dividend and aggressively acquire shares on any further weakness, which should support the share price around its current level.

For those who have been considering whether to invest in Apple (NASDAQ:AAPL), I believe that this year's best pricing may emerge in the next few months and that shares are likely to outperform the market between now and the end of 2014. In the coming months, it appears likely that investors should remain cautious and that this is also a good reason to consider Apple in conjunction with any larger reductions to a portfolio.

Though Apple will likely decline in a broad market sell-off, it should do better than the broader market because it substantially underperformed during the market's prior year or outperformance and has a significant cash position. See a mid-term performance chart comparing Apple to the S&P 500 (NYSEARCA:SPY) (Source: Google) (click to enlarge)Click to enlarge

This underperformance indicates Apple was decoupled from the broad market before 2013 and may be less sensitive to any coming correction. In many ways, Apple has already had its correction. This also includes its year-to-date performance, where Apple is now down about 7.4% versus the 1.7% loss for the SPY.

Apple's cash is certainly another reason why Apple should outperform the broader market through any coming correction. Its cash and equivalents position is substantial, with the company holding nearly $159 billion at the end of 2013, or about one-third of Apple's current market value. The cash hoard also has a tendency to grow, which is how it became so substantial.

This cash is largely being held overseas to avoid being taxed by the United States. The company last reported having around $40 billion in the US, or around $45 per share. It is this pile with which Apple pays its dividend and buys back stock. The bulk sits internationally, and is most likely to be used for device production costs and international acquisitions.

The costs of ramping up production for a new Apple device are significant, as is the global marketing budget. Still, Apple is not likely to use more than 25% of this overseas cash on production, distribution and marketing of its products this year, even if it releases a new iPhone, iPad and MacBook between June and October. It also appears unlikely that Apple would spend more than even 25% of its overseas cash on whatever acquisitions it may consider completing in 2014. Further, it is entirely possible that the overseas cash will grow between now and the end of the year.

All of this cash, and Apple's deliberately slow usage of it, shows discipline and will likely eventually work to the company's advantage. The domestic cash can support a dividend increase this year, and one is somewhat likely. Also, it provides Apple with the ability to be a strategic buyer of shares as part of the company's massive buyback program. Apple bought $14 billion in shares after reporting Q4 earnings in January and the move appears to have set a floor for the shares and also quieted Carl Icahn's clamor for massive buybacks and dividend increases.

It is likely Apple will step in and buy more shares at an accelerated rate if the price is around or below $500. It is also quite likely that the investor appreciation for Apple's cash balance will increase if the market declines further. Similarly, Apple's competitive and growing dividend would be a more appreciated attribute if the market were to correct here.

An allocation into Apple from the broader market is at least a partial move to cash. According to a recent Moody's announcement, Apple's 2013 cash position accounted for a staggering 9.7% of total corporate cash. Apple has about one-third of its market value in cash and most equity funds maintain substantially lower cash positions than Apple has, even when taking a conservative stance.

Many have been waiting for Apple to finally begin using its massive stockpile of cash to acquire next level technology. While Apple considers acquisitions, competitors are making them. For example, Google (NASDAQ:GOOG) has bought numerous companies in the last year, including Nest, which makes sensor-driven, smart thermostats and smoke detectors, and multiple robotics companies.

Similarly, Facebook (NASDAQ:FB) has recently engaged in some substantial acquisitions. The company recently acquired WhatsApp, a cross-platform mobile messaging service, for $19 billion and Oculus, a virtual reality headset maker, for $2 billion. While it is far from clear whether these acquisitions will be successful, it should be noted that many thought it was absurd for Facebook to acquire Instagram 2 years ago for $1 billion, but that acquisition now appears shrewd. Meanwhile, Apple has never made an acquisition for over a billion dollars.

Beyond a possible boost from new devices, 2014 revenue should benefit from Apple's recent relationship with China Mobile (NYSE:CHL), which is China's dominant mobile phone carrier. Apple will likely recognize some benefit from it, as Apple products continue to find new adopters and existing product users that are loyal to the company for future technology. Initial CHL sales numbers were considered light, but could improve. While the iPhone appears unlikely to have a majority share of the market, it will likely maintain a decent slice of the market for high-end smartphones, both because of the functionality of the device and that owning the newest Apple products is a status symbol.

For these reasons, Apple appears to be a fairly conservative allocation at the moment, and one that is likely to outperform the broader market between now and the end of the year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.