Apple's Future Depends on Leaping Hurdles, Not Earnings

May 30, 2011 11:10 AM ETApple Inc. (AAPL)30 Comments
John Tobey, CFA profile picture
John Tobey, CFA
1.25K Followers
HurdlesThe burning question seems to be, “Why is Apple (NASDAQ:AAPL) selling at such a low valuation?” Just try to find another company with Apple’s creative, development, business and financial success that has sold at 12 times its forecast earnings. This high 8.3% earnings yield is typically awarded to growth sluggards or income stocks.
Is the problem that Apple’s earnings are simply too high? That’s highly doubtful, for three reasons.
Secretive Apple offers no guidance. If it did, management would have to explain the reasons, and it protects all such information from being publicized. Of course, the unknown in investing produces uncertainty – and that means analyst and investor wariness. As a result…
Apple has consistently exceeded analyst estimates. Analysts have a natural conservatism (yes, that is so – they don’t want to appear over-optimistic and tarnish their reputations). Therefore, forecasts are kept conservative. Plus, there is another factor analysts really cannot include…
Apple’s exceptional growth comes from product creation and major product enhancements. Even if analysts knew what was coming (like the rumored iPhone 5), they would be at a loss as to how to include the financial effect. Without Apple’s providing details (like dates, prices, marketing plans and costs), determining the earnings effect is pure guesswork, especially for periods beyond this quarter.
Therefore, it seems likely that Apple’s next twelve months of earnings will be higher than analysts estimate.
So, forget the earnings and focus on the “hurdles”.
In 1998, I selected Glen Bickerstaff (portfolio manager at TCW Group) to run a growth stock portfolio. His approach was designed for investing in (and holding onto) high growth companies. Here’s what I wrote in December 2009:

Glen found that most analysts had trouble forecasting sustainable rapid growth. Rather, their models had a natural slowing in the growth rate. Glen

This article was written by

John Tobey, CFA profile picture
1.25K Followers
I am the founder and editor of Investment Directions. My career has been managing and consulting to multi-billion dollar funds. Using the widely accepted “multi-manager” approach, I have worked with top investment managers throughout the country, gaining a high level of expertise. My career has spanned many market environments, and I have hands-on experience searching out opportunities and avoiding risks in all of them. I now devote my time to Investment Directions, with the goal of helping investors further their understanding and improve their investing skills. I am currently serving on: The AAUW Investment Advisers Committee and The City of Vista Investment Advisory Committee.

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