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The Only Investment Startegy You Should Follow

Jul. 10, 2013 2:07 PM ETAAPL
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Seeking Alpha Analyst Since 2013

Guy Conger is licensed as an Investment Advisor Representative (IAR) and is licensed to sell and/or discuss Advisory Services & Products with anyone residing within the United States. IAR registration is in: Texas Guy Conger is licensed to sell and/or discuss insurance products only to residents of the states listed below: Texas Since beginning his career in Money Management Guy has received the designations of Registered Financial Consultant (RFC) and Certified Financial Educator (CFE). Guy has 15 years of experience in the financial services industry. Services Offered: Fee Advisory, Financial Planning, Portfolio Management and Risk Management. Professional Licenses: Series 7, Series 66, Series 63, Series 22, Group 1 Life Publications: Personal Money Management (self-published) Contributing Columnist- Wiseradvisor.com Blogs- Money.ca

Buy Low Sell High. Yes as it always has been and always will be the single greatest investment strategy is to purchase an investment at it's lowest possible price and sell it at it's highest possible price. So simple yet so hard to do, after all APPLE Inc. (AAPL) hasn't come out with a Crystal i Ball yet.

The simplest way I know of to figure out the best buy price for any asset is using Discounted Cash Flow analysis. Originally used to assign a monetary value to private companies it has become an extremely popular way to value public companies thanks to two men Benjamin Graham and his most famous student Warren Buffet.

For those who don't know or may need a quick refresh, a DCF valuation works on the principle of projecting the expected future cash flows available, in this case to equity holders, then discounting these cash flows into today's terms considering risks and expected returns. Basically, it's the intrinsic value of the company's equity.

If you are interested in learning more about this valuation method I suggest you buy or download the book "The Intelligent Investor" by Benjamin Graham (no I do not get anything out of recommending this book...but I sure wish I did).

A much simpler way to figure a buy price is to compare the current market price to a companies Book Value Per Share this number is easy to get by visiting the Yahoo Finance (YHOO) website.

Now just because a companies stock price is the same as it's Book Value Per Share doesn't mean you should buy it; as I tell all my clients we will have to drill down deeper and make sure there is oil in that hole before putting our money in it.

Since I'm a big fan of APPLE and have purchased shares for all my clients let's do a little DCF and see if it is a good buy at it's current price of $422 (as of 07/10/2013).

I expect APPLE to have 21% growth in revenues this year, which stabilizes down to a 3% long-term growth rate in the expected scenario. At the same time operating margins level off to 27%. This is somewhat in line with analyst expectation.

I also increase and keep working capital expenditures quite high, as I expect they will be needed for Apple to not let competitors get ahead. The WACC is set at 10% in the expected scenario, the common WACC associated with Apple and the industry.

Finally, the present value cash flows determined by the DCF are only those related to the operating assets. Apple has a significant amount of non-operating assets/capital that needs to be included in the valuation. That being excess cash, short-term investments and long-term marketable securities. These are all either cash or marketable investments that should be easy to liquidate. For this exercise I keep them at balance sheet value.

Currently APPLE has more than $137 billion in excess cash and marketable securities. This capital as mentioned is not a part of the business operations (i.e. non-operating capital), and should separately be included in the DCF in my opinion. I have also removed the earnings from these holdings from our DCF valuation by assuming an income of 0.4% a year on their value. The incomes were removed due to not being a part of regular operations, i.e. operating capital. Note, Apple has no debt, therefore there is no need to net and debt out of the calculation.

After doing the math I get a per share value of $602 for APPLE which indicates the current market price is a good value.

Disclosure: I am long AAPL.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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