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Thomas H. Kee Jr., is President and CEO of Stock Traders Daily. The Stock of the Week Strategy offered by Stock Traders Daily may be the best performing strategy on the market since December, 2007 (before the credit crisis), and "The Investment Rate" is arguably the best measure of the... More
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  • Apple: Better Off Not In The Dow?

    Investors in the move Apple Computer (NASDAQ:AAPL) have been waiting a long time to see their company become part of the Dow Jones industrial average, and finally that day has come. The interesting part is that the addition of Apple in the Dow Jones industrial average may actually have negative influences on the stock.

    In my instablog I have already identified fair valuation for Apple based on EPS growth estimates, the PE ratio, and the relative peg ratios that exist today and that would exist a year and two years from now if analysts are right about their estimates, and everything considered the valuation that is currently placed on Apple is far better than what is placed on AT&T (NYSE:T), so the valuation of the Dow Jones industrial average will improve slightly, but overall the Dow Jones industrial average is not attractive on a valuation basis whatsoever.

    The Dow Jones industrial average, with all stocks combined, has meager growth and it is expected to maintain that path for the next couple of years even with Apple. With a PE multiple that is relatively high and growth that is expected to be subdued, if not worse given the currency fluctuations, investors in the Dow Jones industrial average might eventually be concerned with the valuation of the Dow Jones industrial average and selling pressure may hit the Dow accordingly. When selling pressure hits the Dow, it has negative influences on all DJIA components.

    If that happens investors in Apple are going to see selling pressure hit their stock and that selling pressure might actually surprise them. The addition of Apple to the Dow Jones industrial average improves the valuation metrics for the Dow Jones industrial average slightly, but not significantly, valuation for the Dow Jones industrial average is still a major concern, and if investors ever begin to believe that valuation matters again selling pressure is likely to come.

    Obviously, this works both ways, and if investors perceive value, or if money flows simply come into the Dow Jones industrial average regardless of value, shares of Apple will naturally benefit because they are now part of the Dow Jones industrial average.

    That boils down to a simple question. Is the Dow Jones industrial average fairly valued at these levels? My answer is that it looks extremely expensive, the dividend payout ratio for the Dow Jones industrial average is declining with the addition of Apple and that is not comforting to investors in the Dow, and I firmly believe that valuation concerns are going to haunt the Dow Jones industrial average and cause pressure all year long with a lingering risk that any negative news event could hit the market harder than anyone expects because stimulus is over and the FOMC is actually starting to consider raising interest rates.

    They are doing this in the face of what my macroeconomic work considers to be the third major down period in US history, and economic condition predicated on natural growth rates, but one that has been masked by the fabricated dollars infused into the system by the FOMC.

    If my observations about the market are right and selling pressure comes into the market as a whole I believe that will translate into added pressure on shares of Apple, pressure that would not otherwise have been there if Apple was not part of the Dow Jones industrial average like it is now.

    In my opinion, Apple may have been better off not being part of the Dow Jones industrial average.

    Mar 20 1:40 PM | Link | Comment!
  • Fair Value Analysis For Apple

    This article identifies the fair value for Apple (NASDAQ:AAPL) using an earnings driven approach. Our focus is on earnings and projected earnings growth using complete earnings cycles to discount seasonal anomalies while excluding onetime events to focus more on actual growth rates. Our forecasts look ahead two years, but not more than two years because we believe that analysts' visibility is limited and we often see substantial changes to earnings estimates quarter over quarter so projections that extend two years often change substantially and are unreliable in most cases.

    By focusing on analysts' expectations going forward our analysis also includes all of the variables that might go into the stock's price, including new products, competition, pricing, and future demand.

    To begin, our evaluation of earnings growth shows us that earnings growth for Apple kicked into gear solidly in the fourth quarter of 2014, surpassing 24% earnings growth. This bettered the previous data which was a little better than 11%, which in turn surpassed the data before which was a little better than 9%. The past few earnings releases from Apple have been solid, showing continued growth at what now is a very rapid pace.

    (click to enlarge)

    In addition, analysts are expecting earnings growth of 19% in calendar 2015, represented by the first red dot in our earnings growth graph, and then earnings growth of 23% by the time 2016 is said and done. That means that analysts are expecting Apple to continue to grow earnings at a very rapid rate.

    That brings our attention to the PE multiple. The PE multiple for Apple is currently 17.13 (the blue bar in our chart). This is lower than it was a November, when the PE multiple was 18.49, but still that PE multiple is higher than at any time between then and the third quarter of 2011.

    (click to enlarge)

    However, the multiple is also expected to fall by the end of 2015 if analysts are right about their estimates for earnings growth and price remains the same. Represented by the first red bar in our PE chart, the PE multiple for calendar 2015 would drop to 14.88, and if analysts are right about calendar 2016 and price remains the same the multiple will drop even further to 13.88.

    This combination of earnings growth and forward looking PE multiples allows us to focus on valuation using a peg ratio approach. Our identification of fair value considers fair value to be when the peg ratio is between 0 and 1.5. Until recently shares of Apple or pressing the high-end of fair value with peg ratios at or above 1.5, but after the most recent earnings release the peg ratio declined to 0.71. That's represented by the blue dot in our peg ratio chart. The first red dot represents what the peg ratio will be if earnings meet analysts' expectations and price remains the same at the end of 2015. That is 0.75. The second red dot represents 2016 values and is 0.59.

    (click to enlarge)

    Everything considered, if analysts are correct about their earnings estimates and price remains the same Apple will not only look attractive based on expected earnings growth but it could reasonably be considered to be undervalued.

    That begs the question, should price remain the same? Unless analysts' estimates change materially, our estimation of fair value suggests that Apple should be higher than it is today by this time next year.

    Clearly, as this year progresses and analyst estimates for 2016 become more concrete and 2017 estimates become more reliable this evaluation could change, but as it stands today, with current analyst estimates in tow, the fair value for Apple could arguably be much higher than it is today.

    When we couple in our combined analysis for Apple with this fair value analysis we do reach an additional conclusion and that is that Apple is much more likely to decline from recent highs in at least the near-term than it is to continue to break out like it has thus far in calendar 2015. The stock does look interesting on dips, and we would consider buying the stock if it falls back, but even with this fair value assessment in hand our combined analysis tells us to be patient. Market analysis does play a role in our combined analysis for Apple as well.

    Mar 10 1:05 PM | Link | Comment!
  • Qualcomm Looks Expensive

    This article identifies the fair value for Qualcomm (NASDAQ:QCOM) using an earnings driven approach that focuses on current and forward looking analysts estimates looking out 2 years but not more than 2 years because our experience has taught us that analysts estimates tend to change dramatically over long time spans and 2 years of forward looking estimates is often more than most analysts or even companies can accurately predict. The analysis further excludes onetime events to focus on truer growth rates and includes complete earnings cycles so as to avoid seasonal anomalies.

    This analysis when applied to Qualcomm reveals some very important things about fair valuation, beginning with the recognition that EPS growth rates have been coming down from above 20% in 2011, but still appeared reasonably good as of the last release, where earnings growth came in just above 12%.

    (click to enlarge)

    The problem, however, exists in the forward looking observations. If analysts are right about their estimates for calendar 2015 EPS growth will only be 2.43% (first red dot), and if they are right about 2016 growth will trickle to 2.11% (second red dot), each of which are a far cry from even the most recent growth rate.

    Important: The recent buyback announcement will not change this meaningfully. If the buyback was already finished 2015 EPS data may increase to 2.7% and 2016 to 2.4%, but these numbers are still meager compared to growth in recent years.

    That brings our attention to the PE multiple. The current PE for Qualcomm is 13.93, represented by the blue bar in our graph, and it is low by historical standards, which makes the stock appear inexpensive to the naked eye. If analysts are right about 2015 EPS and price remains the same the PE will increase to 14.6 by the end of 2015, and if they are right about 2016 decline slightly to 13.64 as well.

    (click to enlarge)

    This combination of earnings growth and PE analysis allows us to conduct a PEG ratio analysis for Qualcomm, and from that something very important surfaces. WE define fair value using a PEG ratio approach to be when the PEG Ratio is between 0 and 1.5, and the most recent PEG Ratio for Qualcomm is 1.15, represented by the blue dot in our graph. This is also okay at first glance, but when we look ahead at analyst's estimates for 2015 and 2016 that changes completely. The PEG ratio jumps to 6.01 by the end of 2015 and to 6.47 by the end of 2016 if analysts are correct and price remains the same.

    (click to enlarge)

    That begs the question, should price remain the same?

    According to our combined analysis for Qualcomm the stock faces serious pressure at these levels and we would not be a buyer of the stock here. In fact our combined analysis suggests that Qualcomm may actually be an excellent short candidate on strength.

    From a value oriented investor's perspective, there is no value in Qualcomm and unless something dramatic happens in the coming months Qualcomm runs the risk of deteriorating in price and therefore value oriented investors should absolutely avoid this stock. If the stock falls hard that may change, we will re-review this stock daily and if price declines or estimates change so will fair value, but as it stands now there is no value in Qualcomm at this time based on its lackluster forward earnings growth expectations.

    Disclaimer: Stock Traders Daily produces risk controlled proactive strategies and has since January 2000, the relative peak of the Internet Bubble, but proactive strategies require additional work that many investors are not willing to do. The analysis provided here shoud not be construed as a recommendation to invest or not invest, and every investor should consult with their personal financial advisor before making any decisions. Investments in the stock market always run the risk of losing money.

    Mar 10 1:04 PM | Link | Comment!
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