What Do Apple And Charles Schwab Have In Common?

Jun. 9.14 | About: Apple Inc. (AAPL)

Summary

Both companies are headquartered in Northern California.

Both companies are fairly priced on near-term earnings growth potential.

And most importantly, the retail investor is what they have in common.

The retail investor is what Apple Inc. (NASDAQ:AAPL) and Charles Schwab Corp. (NYSE:SCHW) have in common. During the second quarter conference call, Apple CEO, Tim Cook stated that they are splitting the stock seven for one "to make Apple stock more accessible to a larger number of investors." This statement alone signals that Apple board would like the retail investor to be in the stock as well as the big boys. Each shareholder at the close of 2nd June, '14 will receive six additional shares of the stock starting 9th June, '14. Now where does Schwab come into play, you ask? Easy, Schwab is the high-growth financial services provider of choice the retail investor on the sidelines is most likely to join just to get a few shares of Apple. With the Apple stock split, big-time investors have bid up the price of the stock 21.42% since it was announced, and starting 9th June, '14, there will be more shares on the open market, but at a lower price. Once the split happens, the retail investor will bid up the price a bit more as some of the big boys begin to offload some shares. Then, after a few more percentage point gains, I believe the big boys will sell off the stock a bit to lock in gains, all while the new retail investor will be scooping up those shares.

I currently hold Apple in my dividend portfolio. Apple designs, manufactures, and markets mobile communication and media devices, personal computers, portable digital music players, and a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. On 23rd April, '14, the company reported fiscal second-quarter earnings of $11.62 per share, which beat the consensus of analysts' estimates by $1.44. In the past year, the company's stock is up 46.12%, excluding dividends (up 48.5% including dividends), and is beating the S&P 500 (NYSEARCA:SPY), which has gained 18.62% in the same time frame. Since initiating my position back on 28th May, '13, I'm up 33.82%, including dollar cost averaging and reinvesting dividends, while the S&P 500 is up 18.17%.

I currently don't own any shares of Schwab in my growth portfolio, but will be adding it in the next few days. Schwab is a savings and loan holding company which, through its subsidiaries, engages in securities brokerage, banking, and related financial services. On 15th April, '14, the company reported first-quarter earnings of $0.24 per share, which beat the consensus of analysts' estimates by $0.02. In the past year, the company's stock is up 29.08% excluding dividends (up 30.06% including dividends), and is beating the S&P 500, which has gained 18.62% in the same time frame. With all this in mind, I'd like to take a moment to evaluate both stocks on a fundamental, financial, and technical basis to show why they are both good for each other in the long run.

Apple

The company currently trades at a trailing 12-month P/E ratio of 15.43, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future, as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 13.46 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $47.96 per share, and I'd consider the stock inexpensive until about $719. The 1-year PEG ratio (1.77), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced, based on a 1-year EPS growth rate of 8.7%. In addition, the company has great long-term future earnings growth potential, with a projected EPS growth rate of 15.19%.

On a financial basis, the things I look for are the dividend payouts, return on assets, equity, and investment. The company pays a dividend of 2.04% with a payout ratio of 31% of trailing 12-month earnings, while sporting return on assets, equity, and investment values of 18%, 30.4%, and 25.5%, respectively, which are all respectable values.

The really high return on assets value (18%) is important, because it is a measure of how profitable the company is relative to its assets, telling us how efficient a management team is at using its assets to generate earnings [for comparison purposes, Apple has the third-highest ROA of all companies in the electronic equipment industry, trailing Eastman Kodak Co. (NYSE:KODK), which sports an ROA of 57.7%, and Fabrinet (NYSE:FN), which sports an ROA of 19%].

The really high return on equity value (30.4%) is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry [for comparison purposes, Apple has the highest ROE of all companies in the electronic equipment industry, ahead of Fabrinet, which sports an ROE of 26.6%, and SGOCO Group, Ltd. (NASDAQ:SGOC), which sports an ROE of 12.8%].

The really high return on investment value (25.5%) is an important financial metric, because it evaluates the efficiency of an investment that a company makes, and if an investment doesn't have a positive ROI, then the investment should not be made (for comparison purposes, Apple has the second-highest ROI of all companies in the electronic equipment industry, behind Kodak, which sports an ROI of 172.1%, and ahead of Koss Corp. (NASDAQ:KOSS), which sports an ROI of 25.2%).

Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.04% yield of this company alone is good enough for me to take shelter in for the time being.

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Looking first at the relative strength index chart [RSI] at the top, I see the stock in overbought territory, with a current value of 77.93. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line, with the divergence bars flattening in height, indicating the bullish momentum is getting tired. As for the stock price itself ($645.57), I'm looking at $658 to act as resistance and $619.17 to act as support, for a risk/reward ratio which plays out to be -4.09% to 1.93%.

Schwab

The company currently trades at a trailing 12-month P/E ratio of 29.85, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future, as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 22.1 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.38), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced, based on a 1-year EPS growth rate of 21.64%. The company has great near-term future earnings growth potential, with a projected EPS growth rate of 21.64%. In addition, the company has great long-term future earnings growth potential, with a projected EPS growth rate of 23.3%.

On a financial basis, the things I look for are the dividend payouts, return on assets, equity, and investment. The company pays a dividend of 0.92% with a payout ratio of 28% of trailing 12-month earnings, while sporting return on assets, equity, and investment values of 0.8%, 12.1%, and 9.4%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 0.92% yield of this company alone is good enough for me to take shelter in for the time being.

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Looking first at the relative strength index chart [RSI] at the top, I see the stock in middle-ground territory, with a current value of 53.26. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line, with the divergence bars increasing in height, indicating bullish momentum. As for the stock price itself ($25.97), I'm looking at $26.69 to act as resistance and $25.62 to act as support, for a risk/reward ratio which plays out to be -1.35% to 2.77%.

Conclusion

After doing this analysis, it is clearly evidenced that Apple is a value story, while Schwab is a growth story. I'm adding Schwab to my growth portfolio in the next couple of days, because I believe it is the best way to play the higher quantity of transactions and increased volume trading made among the retail investor, in addition to being a growth story. As for the Apple split itself, to me it means nothing, to you it should mean nothing as well. Take a pie and cut it up into seven different pieces, and you still have a whole pie; it is just more accessible to the hungry masses in your household. But I honestly don't believe now (post split) is the best time to add to my position in Apple, I'm going to wait a bit and let it come in. Splits don't usually bode well for the company immediately. I will leave you with a few examples below to demonstrate that splits don't usually work out immediately due to the phenomena I discussed earlier with respect to big boy investors dumping the stock immediately afterwards.

Deere & Company (NYSE:DE) split the stock 2:1 in late 2007 and dropped 59.48% the following year, but has rebounded nicely.

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MasterCard Inc. (NYSE:MA) split the stock 10:1 earlier this year, and so far has exhibited a 5.34% drop, but it was much lower and has rebounded nicely.

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Under Armour Inc. (NYSE:UA) also split earlier this year, and dropped about 10% before rebounding nicely.

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Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions, and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long AAPL, MA, UA, SPY. 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.