I am always searching for well-thought-out, diverse points of view regarding any investment opportunity I find of interest. Every once in a while, I come across an investment commentary that provides a perspective that stands out from those I had previously found on a topic. Recently, I stumbled upon the March 2012 monthly commentary from Obermeyer Asset Management's John Goltermann. His piece, "The Apple Conundrum," outlines why he finds an investment in Apple (AAPL) to be "too difficult" to make.
Perhaps your initial reaction is, "What's so difficult? Buy Apple, make money." In the monthly commentary, Mr. Goltermann outlines his argument for why at current levels he doesn't find enough value in Apple's stock to purchase it for his clients. Compared to other non-bullish theses on Apple, I found his commentary too important to ignore. I think it is worth a read for every Apple investor.
When investing, I always try to put aside confirmation bias and open my mind to arguments counter to my current investment thesis. Whether or not you agree with his points or think his numbers might be a bit off, it is at least worth testing your faith in your Apple investment by reading "The Apple Conundrum." For those interested in reading Mr. Goltermann's entire commentary, it can currently be found about half way down the right side of Obermeyer's home page, under "Obermeyer Perspective."
For those more interested in some of the highlights, here are a few:
1. Apple's market cap is now greater than the entire utilities industry, and "every dollar move in Apple's share price represents nearly $1 billion in net new capital flowing to its shares. For context, the median company size of those in the S&P 500 is $12 billion, so a 2% move in Apple's stock is the equivalent of adding a whole new company at the median value to the index."
2. By market value, Apple is now the largest company on earth. It also attracts significant amounts of speculative capital. Many of the large speculators have very short time horizons. Speculative capital tends to "chase things or go where it seems as though there is very little near-term risk…until the risk assessment changes."
3. "Apple investors can expect somewhere in the range of $10 - $15 billion in total pre-tax profit for this newest version of the iPad. Unless investors thought Apple's stock was way too cheap before the new iPad announcement, they seem to be expecting much more value to be delivered to shareholders from the iPad launch than can be reasonably be delivered by sales of the iPad device itself. The $172 billion increase in the company's value (this year) far exceeds the approximately $15 billion that will come from the iPad, so it will have to come from something else. We don't know yet what that 'something else' is."
4. Using Obermeyer Asset Management's models, to justify the current stock price, Apple will need to sell approximately $2.6 trillion worth of products and services over the next 10 years. If its margins shrink from current levels, it will need to sell more. This means that "with the average GDP per capita in the United States being around $50,000, each person must spend $750 on Apple products and services annually (since 30% of sales are domestic, this means that about $225 per U.S. citizen would go to Apple every year). Since not all 310 million people in America use Apple, those who do need to spend a lot more and the vast majority of those sales will need to be on devices because iTunes sales do not bring much profitability."
5. Pretty much everyone is bullish on Apple and "bullishness (and stock prices) reaches its maximum when the company in question has demonstrated a recent run of doing no wrong."
I am neither an Apple bull nor bear. I pay attention to Apple because its market cap is too large to ignore. With a recent weighting of 4.53% in the S&P 500 (SPY) and 18.85% in the Nasdaq 100 (QQQ), Apple's stock has the power to move indices. As an equity investor, I want to follow any company that can move indices regardless of whether I own the shares. This is because in an investing world in which index investing has become so popular, a company that can move indices will indirectly move other equities as well. And there's a good chance I own some of those other equities.
On a closing note, Apple is not the only stock with a rather large weighting in one of the major market averages. IBM (IBM) and Microsoft (MSFT) also have influential weightings. IBM currently has an 11.99% weighting in the Dow Jones Industrial Average (DIA), and Microsoft checks in at 8.93% of the Nasdaq 100. Whether or not you own shares in Apple, IBM, or Microsoft, if you are attempting to gauge the strength of an underlying rally in the major market indices, it's helpful to keep an eye on their stocks. It is possible for those three stocks to perform so strongly that they mask mediocrity in the rest of the stock market.
Finally, if you are an Apple shareholder, your unrealized gains are likely quite impressive. And now you have a dividend to boot. Even though the sun has been shining on Apple's stock for quite some time, don't forget to check the weather forecast every once in a while just to make sure there aren't any rain clouds coming that you can't yet see.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.