Cisco Sell-off Puts Apple at a Discount

Among different asset classes, Wall Street frequently makes a difference between growth and value investing. For me, as an individual investor, the difference is irrelevant. For an investor to make money in a particular stock of a company, the company has to have growth. If the business of a company is not growing, you cannot make money in that stock barring special situations such as arbitrage. Furthermore if you don't purchase a growth company at the right price, chances are you that you will end up losing money.

Based on the above observations we must look for a "growth at value" approach. It is easier said than done. If you use any stock screener to find companies with PE/G ratio less than 1, you will find that most of these companies have limited future outlook due to changed market conditions. Some of these companies may in fact turn out to be stars but if you buy the top 15 companies, you will still probably not beat the market. Considering the efficiency of the market, there is a reason that these companies are priced so low.

If it is so hard to beat the market then how do we get an edge over the market? You can perform at par with the market by just buying the index funds and for most of the individual investor this is probably the only way of making money in stock market. But sometimes in its manic or panic mode, Mr. Market provides us opportunities that, if availed, can provide us an edge over the market. Lets take an example:

Last week Cisco (CSCO) gave its earning results and because of the weak guidelines there was a major sell of the tech sector. When a sector is going down everything that is deemed to be in this sector goes down. Consider the stock price movement of Apple Computers (AAPL) in the last week. Apple is considered a large growth stock and it has had a dream run over the past couple of years. With a tag of 'growth stock' comes the volatility. If NASDAQ fell about 8% last week, Apple fell about 25%. Let's analyze this situation. Considering the price the market placed on Apple about 7 days ago - $190 - did the future prospects of Apple fall so much by Cisco's outlook that Apple deserved a fall of 25%? First of all, it is hard to find a strong correlation between Cisco's business and Apple's business, so Cisco earnings should not affect Apple's business. Even if we can see that there is a direct correlation between the two businesses, does Apple deserve to have its PEG ratio contracted far more than that of Cisco?

If you believed in Apple's price at $190, 7 days ago, then you should really be thanking Mr. Market for selling Apple at $151. If you took advantage of this anomaly and transferred some of your money from index funds to Apple stocks, you will beat the market!

Disclosure: none

Comments

[sane_man]

What planet are you from? Stocks went down because Cisco announced that the market is lumpy meaning market is slowing down. If market slows won't Apple be impacted? Cisco makes complex equipments for enterprise customer. Apple is making gadgets for consumer market which is already having strain from subprime meltdown. Cisco was trading at P/E of 25 and Apple was at P/E 45 when Cisco announced results. A stock will fall down based on how risky that stock is and how overvalued it is. You should feel happy that Apple only fell 25%.

[Tom B]

Disagree. Cisco makes cheapo networking products that can easily be replaced by superior offerings at a comparable price point. Apple makes computers that can NOT be replaced by anything comparable. Similarly, no one is forcing anyone to buy an iPod or iPhone, but if you don't, you end up with significantly reduced quality/functionality.

"Apple is making gadgets for consumer market which is already having strain from subprime meltdown." 1) not entirely 2) consumers are perfectly happy to run up debt. And, maybe you can buy a sensible car instead of a gas-guzzling SUV to pay for your shiny new iPod Touch.

"For an investor to make money in a particular stock of a company, the company has to have growth" Dividends. Utilities.

[sane_man]

You said,
"consumers are perfectly happy to run up debt. "
I got a jolt while reading that line. If such customers and kids are the ones buying Apple stocks and products, do I need to say more where it is heading?

You provided some stats about phones and computers to the other poster. Every year 1 billion phones are sold world over. Apple has sold around 1.5 million so far and not able to sell their phones outside US. Europe release is a flop. They have around .15% market share now and are already facing obstacle.

Regarding computers, UNIX is the king in enterprise market. Windows is also successful now in that space. MAC is nowhere in the picture. Your posting is a good joke. In PCs, Apple is still below 3% market share worldwide.

[Tom B]

"Regarding computers, UNIX is the king in enterprise market. Windows is also successful now in that space. MAC is nowhere in the picture. Your posting is a good joke. In PCs, Apple is still below 3% market share worldwide."

That's because the computer age is in its infancy. That's why you need one IT guy to support about every ten Windows computers when all you are doing is running simple stuff like Email. BTW: Apple's OS X is the most widely used certified variety of UNIX on the planet. FACT. Check it yourself.

[Hayweed]

What kind of analysis is this. Was $190 a good price. I thought it was too high. Under your theory any overpriced stock down 25% would be a buy.

[Tom B]

"Was $190 a good price. I thought it was too high."

190 was an excellent price. We could be looking-- as a credible analyst suggested-- at 45 M iPhones by the end of 2009. Credible, because 10 M by the end of '08 is a given and the cell market is MUCH bigger than people understand.

Furthermore, computer market share was at 8% in the US last quarter. That leaves 92% potential upside. Enterprise has yet to comprehend that they can run their nasty little accounting program from 1986 under XP (bteer than Vista) ON A MAC-- and then use OS X for most of the day. You could HUGELY reduce IT support costs by reducing the fraction of time people are spending in Windows. Paul Otellini (Intel CEO) uses a Mac. How long you think it's going to be before he figures out that he can stick it in his brief case and bring it to work?

AppleTV has been a loser. Once they hit version 2 and make it better than TiVo (I'd say it isn't yet), there's another huge new market.

[samij]

10m iphones by end of 2008 is nowhere near given. the phone is selling 1m/q in the us, 6m by end of 2008 there. the european sales are not very high, mostly because of the insane price point of not only the phone, but more importantly the plans. at this pace the sales are going to be well under 2m by end of 2008 in whole of europe.

where the missing 2m would come? japan/korea: gsm only is a deal breaker, china+india+russia: knowing those markets i'd say most of the potential buyers already have iphone (remember the gap between iphones sold and iphones activated on att network)...

in order to sell 10m iphones, i'd say they have to adjust the price point radically in europe, and most importantly, they need to convince the operators to adjust the price points of their iphone plans.

and to sell 35m in 2009? apple will need a model that costs $0-$50 with 2y plan and reasonable monthly plans. they might well do that, but you can't apply the profit margin of iphone for those 35m phones...

with potential slowdown in economy in horizon, i'd say pe 45 is somewhat too optimistic pricing even for an excellent company.

[Tom B]

45 M by the end of '09 is admittedly a stretch goal. US sales show further accelerate because of the holidays. EU sales just began. The 10000 in the first day in Germany is probably a record for any smartphone, but is admittedly anemic for this product. Europeans, on average, are more sophisticated than Americans on smartphones; thus Symbian >> Windows Mobile. We should end up with more iPhones sold in Europe PER CAPITA, then, when all is said and done. One potential issue-- no Apple stores in Germany-- maybe fewer outlets overall?

[samij]

like in the us (270,000 sold at launch), the day the sales begin is the most important day for this kind of product: however, only 10,000 sold in germany, mere 8,000 in the uk. very bad.

apple needs to address this fast while there still is momentum, the holiday shopping season is starting and iphone will not get any younger. otherwise we're going to see some very cheap iphones after the holidays (razr anyone?).

btw, nice you remembered that the holidays accelerate the sales, remember also that ending of the holidays will slow the sales down even more significantly. speculation of next version of iphone will slow the sales down further.

[Jesus Phone]

another idiot.. why not try comparing U.S. population to Germany's population first...

U.S. - Over 300 Million
Germany - 82 Million
U.K. - 60 Million

***

So, 270,000 on launch WEEKEND
U.K - 8,000 on LAUNCH night!! (first night) entire weekend probably just under 20,000.
Germany - 10,000 on FIRST night! (entire weekend probably just over 20,000).

For countries 1/5 and 1/4 the size of the us... selling a phone that's been widely available hacked to work anywhere for 6 months... I'd say it was pretty damn good sales numbers. very bad? SamiJ... you sir are and lunatic.

Is it record breaking sales for U.K. and Germany.. yes.. name another $400 phone that sold 10,000 on the first day of it's release... ??

All this going into Xmas buying season. and your trying to spin that as a bad thing for sales.. because it will invevitably slow down afterward? Ok, einstein... somebodies spreading some FUD because they are losing their ass shorting apple.

In proportion to our population... Germany and UK sold about 100,000 phones in the FIRST WEEKEND... not as good as the U.S.'s 270,000.. but this was 6 months after all the buzz had died down.

Think about it.. .Spiderman doesn't make as much money in the UK as the U.S... does that mean Spiderman is a failure as a movie?

[sane_man]

According to you, the lower sales in Germany and UK is because of the lowere population there. US Population is 300 mil and German population is 82 mil according to you. 300/82 = 3.66
270K iphones sold in US verses 10000 sold in Germany gives 270/10 = 27. Even if we assume 20K phones sold during the entire weekend 270K/20K = 13.5

Where is 3.6 and where is 13.5?

And for this, you call the other person an idiot and lunatic. Then what are you? Ha Ha!!!!

[Jesus Phone]

Sorry, i rounded up on Germany.. 73,200 estimated first weekend in proportion to U.S. population. But my UK estimated of 100,000 in proportion to U.S. population is accurate.. assuming 20,000K iphones in the entire first weekend were sold.

Either way.. no ones taking into account that some IPHONE buzz has died down over the past 5 months.. Most of the Apple fanatic fans in the UK and Germany bought an an unlocked IPHONE on EBAY 5 months ago. Of course the proportion of sales won't be as big as the U.S's intital release.

No one is refuting that the IPHONE is the best-selling $400 phone OF ALL TIME!!!! This bit of fact alone should have all phone companies messing their pants and scrambling to come up with competition and knock offs.. which they are doing. But Apple will always have the market cornered on the wealthy and sophisticated tech crowd. As well as the young tech-savvy teen and college crowd.. all of whom.. will grow up and keep buying Apple products and computers all their lives.

[yet anothersteve]

If I was less honest I'd be a troll and add to all the skepticism here. Please please please. Sell your AAPL. And then sell some short. Put your money where your skepticism is!

Look at the insane trailing PE and go short. Pay no attention to the PEG. Remember that the future is UNIX and ignore which PC OS is built on top of it. And smartphone.

It's the short of a lifetime. Beleagured AAPL!

Because it wasn't in the 150s long enough for me to actually buy any.

[skeptic1]

Very entertaining post. Sounds like a stockbroker trying to reassure his clients. Next time you might want to conisder doing some analysis. Rimm, goog, aapl, and bidu got hammered for three days. Thos four stocks have been going up every single day since just about august 17. Rimm was up over 100%, bidu was in the same neighborhood, goog and aapl were in the more modest 30-50% range. Point is that apprecciation was a complete overshoot.

At 190$ a share you are basically paying upfront for 3 straight years of 50% eps growth. As an investor, you never want to pay full value for anything...but more importantly you definentely don't want to pay for something that well...let's just say is not a sure thing. Now at 155 apple is more attractive, but still not trading at a long term discount that offers any disciplined investor a margin of safety to his fair value. I'd say apple shares are worth something closer to 155$ based on the next 3-5 years of growth i think the company can sustain. That means it is trading at a premium to my valuation right now. If apple can show me more data points indicating that their growth rate is actually still acclerating...i might re consider and say the stock is worth 200$...but either way that means its still pricey as all hell as that value is based on 5 years of expectations that are pretty high. I'd rather recommend stocks that can grow into a valuation over the next few years. Bcsi, maybe hans, i see opportunities in dell....and of course god knows there are probably some steals in financials...so just becasue apple dropped 25% doesn't mean you need to push the retail idiots back into it. They have enough problems already...they don't need to be force fed overpriced stocks just because the companies are popular.

[skeptic1]

Very entertaining post. Sounds like a stockbroker trying to reassure his clients. Next time you might want to conisder doing some analysis. Rimm, goog, aapl, and bidu got hammered for three days. Thos four stocks have been going up every single day since just about august 17. Rimm was up over 100%, bidu was in the same neighborhood, goog and aapl were in the more modest 30-50% range. Point is that apprecciation was a complete overshoot.

At 190$ a share you are basically paying upfront for 3 straight years of 50% eps growth. As an investor, you never want to pay full value for anything...but more importantly you definentely don't want to pay for something that well...let's just say is not a sure thing. Now at 155 apple is more attractive, but still not trading at a long term discount that offers any disciplined investor a margin of safety to his fair value. I'd say apple shares are worth something closer to 155$ based on the next 3-5 years of growth i think the company can sustain. That means it is trading at a premium to my valuation right now. If apple can show me more data points indicating that their growth rate is actually still acclerating...i might re consider and say the stock is worth 200$...but either way that means its still pricey as all hell as that value is based on 5 years of expectations that are pretty high. I'd rather recommend stocks that can grow into a valuation over the next few years. Bcsi, maybe hans, i see opportunities in dell....and of course god knows there are probably some steals in financials...so just becasue apple dropped 25% doesn't mean you need to push the retail idiots back into it. They have enough problems already...they don't need to be force fed overpriced stocks just because the companies are popular.

[Tom B]

We all understand what Apple's P/E means. But, it's not out of line for a tech company with a power house line up of products facing rudderless, poorly managed competitors.

[skeptic1]

Very entertaining post. Sounds like a stockbroker trying to reassure his clients. Next time you might want to conisder doing some analysis. Rimm, goog, aapl, and bidu got hammered for three days. Thos four stocks have been going up every single day since just about august 17. Rimm was up over 100%, bidu was in the same neighborhood, goog and aapl were in the more modest 30-50% range. Point is that apprecciation was a complete overshoot.

At 190$ a share you are basically paying upfront for 3 straight years of 50% eps growth. As an investor, you never want to pay full value for anything...but more importantly you definentely don't want to pay for something that well...let's just say is not a sure thing. Now at 155 apple is more attractive, but still not trading at a long term discount that offers any disciplined investor a margin of safety to his fair value. I'd say apple shares are worth something closer to 155$ based on the next 3-5 years of growth i think the company can sustain. That means it is trading at a premium to my valuation right now. If apple can show me more data points indicating that their growth rate is actually still acclerating...i might re consider and say the stock is worth 200$...but either way that means its still pricey as all hell as that value is based on 5 years of expectations that are pretty high. I'd rather recommend stocks that can grow into a valuation over the next few years. Bcsi, maybe hans, i see opportunities in dell....and of course god knows there are probably some steals in financials...so just becasue apple dropped 25% doesn't mean you need to push the retail idiots back into it. They have enough problems already...they don't need to be force fed overpriced stocks just because the companies are popular.