Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
When I added Apple Inc. to my Strategy Lab portfolio last September, I was fine with the $700 (U.S.) share price. Since then, my model portfolio has performed very well – no thanks to my Apple stock, which has dropped to about $430 a share.
I'm not perturbed. Growth stocks can experience wild fluctuations. If you're picking your own stocks and have a long-term approach to investing, it's important not to read too much into the swings.
Case in point: Since buying shares of the electric-car maker Tesla earlier this spring, the stock has nearly doubled on me. That's nice, but it doesn't mean the company will be successful in the long term. Just the same, Apple's huge fall doesn't make it a long-term loser.
Apple is holding its World Wide Developer Conference in San Franciso this week. The main event happened Monday, with CEO Tim Cook and other executives taking the stage for the much-anticipated keynote address.
While they didn't unveil earth-shattering news, I think they demonstrated Apple's gas tank is far from empty. I'm just as optimistic about the business as I was in September. And considering the much cheaper stock price, I'm even more optimistic about investing in Apple.
The biggest reveal on Monday was an updated version of Apple's mobile operating system, iOS, for the iPhone and iPad. The new operating system is simplified and beautified, and adds an impressive set of features including free streaming music, automatic updating of apps, easy WiFi file sharing and a gorgeous new way of navigating between tabs in the web browser.
Apple also updated its desktop and notebook operating system, Mac OSX. I think the company is doing an amazing job of making Macs stand out in a world littered with PCs, and integrating iOS with Mac OSX so iPhone and iPad buyers will be more likely to switch to a Mac if they haven't already.
While beautiful products are nice, I think the stock's valuation is even more attractive. According to S&P Capital IQ, analysts expect Apple to generate $43.89 of earnings per share next year, up only 11 per cent from this year's forecast.
I don't think the estimates factor in any disruptive product launches over the next few years, and we all know Apple's track record on innovation. The world's largest technology company trades at less than 10 times next year's earnings. According to S&P Capital IQ estimates, Apple's price-to-earnings ratio is lower than that of other major technology vendors including Dell, Cisco, Google, Lenovo, EMC, Intel, IBM and even the mobile-challenged Microsoft.
Apple's valuation is even more compelling when you consider that cash and cash equivalents on its balance sheet represent a whopping 35 per cent of its market capitalization.
Apple is deploying its $145-billion cash hoard in ways that help shareholders. In April, it announced one of the largest corporate stock buybacks in history. The company intends to buy back $50-billion of its own stock by the end of 2015. If Apple believes that buying its own stock is a good use of its money, it makes me feel even more comfortable holding the stock in my portfolio.
I have a simple investment thesis on Apple. I believe there is a fundamental shift from desktop (and notebook) computing toward mobile computing and that Apple is well positioned to cash in on it.
Apple built up an incredibly profitable business as the No. 2 player in the PC market with well under 10 per cent of the global market. Now with the shift to mobile, Apple is again the No. 2 player behind Android but this time has a far more substantial 17.3-per-cent global market share, according to IDC's first-quarter data. If we look only at the tablet market, Apple is the No. 1 player.
The mobile market is bound to continue growing for years to come. All of the arguments over Apple losing its lead to Google's Android are missing the point. The bottom line is that Apple is more important in the mobile market than it ever was in the PC market.
I see significant growth opportunities over the coming decade, and the stock is sitting in the bargain bin.
Chris Umiastowski