Fellow Seeking Alpha contributor and Reuters blogger Felix Salmon has a way with words. His column makes my list of daily must reads. Often, however, Salmon's mastery of the English language can over-complicate the things he writes about.
Consider Salmon's latest article, Why Apple's Cheap. Talk about riding the fence. I've read through this piece numerous times and still cannot tell if Salmon thinks investors should buy Apple (AAPL) or stay away.
Early on, Salmon seems to chide the view that it's not possible to value Apple on the basis of an unknown future. But, at the end of his article, Salmon begins to waffle and asks the type of rhetorical questions - without question marks - that give financial writers the out of not actually taking a stance. Based on Salmon's analysis of Apple, either way he'll be right:
And then there’s the question of what kind of asset Apple stock really is. Equity is permanent capital, of course, and the best stocks are the ones you buy and forget about and leave to your grandchildren. But it’s frankly hard to imagine that Apple is going to be one of the most valuable companies in the world in 50 years’ time. It has a lot of room to grow, to be sure, but it just doesn't feel like the kind of company which lasts forever. On top of that, Apple doesn’t pay a dividend.
Put those two things together and you have a trading vehicle rather than a long-term play. Buy now, and sell when it reaches X. But the problem here is that no one has a clue what X might be. And if Apple is fundamentally a stock for speculators, rather than a buy-and-hold investment, then at that point things like p/e ratios cease to matter: all anybody cares about is momentum, and whether it’s going up or going down.
Apple never made it as a computer company; its big resurgence took place when it became an iPod/iTunes company. And just when that revenue stream started looking tired, the iPhone came along to turbocharge everything. The iPhone and iPad will be around for a while, I’m sure. But then they’ll be gone. And that will be the end of Apple’s mega-cap days - unless the company can pull yet another new product out of its hat, and one which can bring in billions of dollars of profit every quarter, at that. I wouldn’t bet against it. But I can see why the market might be reluctant to bet on it, before anybody really knows what that product might be.
Let's take Salmon's points one-by-one.
After reading that "equity is permanent capital," I decided it makes the perfect caption for the photo of the Southern California sunset I took last week. Beyond that, I'm not sure how that applies to Apple as an investment or to the notion that "no one has a clue what X might be." Join the club. It's not like investors have any clue whatsoever as to "what X might be" for the thousands of investment alternatives to Apple. And no amount of quantitative analysis can convince me otherwise, particularly when speaking of stocks you get into with hopes of outperforming the market by considerable margins.
Though he does not let us know what he actually thinks, Salmon employs the word "if" to suggest that "fundamentally," Apple might just be "a stock for speculators, rather than a buy-and-hold investment." He wades into mainstream waters, just for a second, using the "Apple doesn't pay a dividend" talking point to back up the unassigned assertion that Apple might not be one of those stocks that you "forget about and leave to your grandchildren."
While I understand that Salmon takes a long-term view of Apple as an investment, it also seems that he expects stock ownership to come complete with a crystal ball. Just because we don't know "what X might be" does not render Apple a stock for speculators. Again, you can apply that tag to every stock in the universe. It's equally as important to note that a distinction exists between sound buy-and-hold investments and stocks you leave to your estate. The two are not mutually exclusive. They operate on different time frames for different people. Salmon does not suggest stocks buy-and-hold investors should look to in lieu of Apple.
I can only assume he means old-school, dividend-paying stocks like McDonald's (MCD) and Procter & Gamble (PG) or products that mimic returns of broad market indices such as the S&P 500, Nasdaq and Dow. Over the last five years, the buy-and-hold investor would have been much better off owning Apple.
Click to enlarge
Chart courtesy of Yahoo Finance
For the record, Apple outperforms, by leaps and bounds, if you max-out the chart or if you look at shorter time periods. Clearly, Apple outclasses the market and most dividend stalwarts in most buy-and-hold portfolios.
After stopping short of taking a stand by wondering "if" indeed Apple is merely a trading vehicle, Salmon, sort of, takes on the question of an uncertain future. This is exactly where I want him to deliver, to tell me what he thinks. Instead, he shifts his concerns over uncertainty from "what X might be" to the question of whether or not Apple can follow up iPhone and iPad's success with something equally as big, just as it did after iPod sales petered out.
Not to oversimplify things, but isn't this the question that dogs investors as they look for adequate buy-and-hold stocks, Apple or otherwise? Should this uncertainty over Apple's ability to continue with the magic push investors into stocks like MCD and PG? Should you settle for solid growth over hyper growth with MCD or, worse yet, render yourself to collecting a stable dividend and 5-10% annual return on shares of PG instead of risking capital on AAPL?
Salmon doesn't answer these questions. Personally, I think you can have it all three ways.
Bottom line - by noting that he would not "bet against" Apple continuing to deliver, but understanding why the market might be "reluctant" that it will, Salmon presents a conundrum, but it's not exclusive to Apple. When you buy a stock, you engage in predicting the future. While circumstances vary case-by-case, that basic premise does not.
If Apple is not worthy of buy-and-hold status on the basis of no dividend, uncertainty over "what X might be" and uncertainty over its future, suggest some other places where investors can put their money to generate something even close to Apple-like returns over the next 5, 10, 15 or 20 years. If you can't do that, all you've done is further contribute to the noise that clouds views of the company and prove the point that all kinds of uncertainty is inherent in investing in stocks. Uncertainty over the future trajectory of a company is not an Apple problem. Rather, it's as elementary as questioning our existence here on Earth. And, based on the abysmal competition Apple faces and its ubiquitous brand, its future looks a heck of a lot more certain than a majority of its counterparts, inside and outside of tech.