The Equities.com research team took a bold shot when it went against conventional wisdom (and Carl Icahn) by suggesting that Apple (AAPL) , the most valuable company in the world, was also notably overvalued. They laid out their case and ultimately arrived at a price closer to $115 – a harsh cut from the $127 it was currently trading at.
Well, turns out, they had a point. We thought we would check back in with Nicholas Bhandari, head of quantitative research, about their bold call, and why it turned out so well.
EQ: So, as we previously discussed, you were swimming against the current when you did your research report on Apple that found it to be overvalued. Since then, it's been almost uncanny how quickly a lot of the risk factors you cited started to show. The bottom fell out on China, their earnings report showed slowing sales growth in iPhones, and the stock is currently sitting just a hair above the $115.18 price target you laid out in your report. Feeling smug?
Nicholas Bhandari:Smug and surprised, to alliterate sufficiently. We were pretty confident in our prospective, but didn't think everything would come to fruition so rapidly, although neither of my analysts were nearly as surprised as I was.
Honestly, it ultimately appeared to be a pretty simple conclusion. Anyone that truly believed a company could be worth the value of a mid-sized country was deluding themselves. We occasionally get so bogged down in valuation principles that we forget they're inherently imperfect, sometimes a BS test is the best way to really figure out how far from the truth you are.
History rarely lies to use entirely, and history says that Apple is at the zenith of its long trail upwards. I don't think the stock isn't worth buying necessarily, but investors looking for that perfect blend of high return/low risk are in for a real surprise. What we should now see is a slow decline into a blue chip value stock.
EQ: So what sort of conditions would you need to see before you start to like it as a blue chip value stock? Where would the price need to be? What sort of actions would the company need to take?
Nicholas Bhandari: An increased payout in the form of dividends and share buybacks would increase the value of the stock, and decrease the required return in capital appreciation, but there is a huge setback to that strategy.
While Apple does have a huge cash pile, most of it is based overseas and cannot be repatriated without a rather large tax liability. The cash they have in the states is not sufficient to increase their payouts. This is the main reason they actually issued debt recently, despite being "flush" with cash. So simply stated, Apple can't artificially buff their stock price by issuing more payouts right now, they’ll need to fall enough to be considered valuable.
We actually stand by the $114 price target at this stage, with what I expect to be a slightly increasing price target on a year-to-year basis based on market movements. If we assume that we require roughly 8.00% in market returns, that leaves us with a price of about $105 before it becomes attractive. The yield on the stock would also rise to about 2.00% at that price, making it more attractive from a dividend perspective as well.
EQ: Apple has been the only bearish call you and your team have made, but several of your bullish calls are also looking pretty good. MagneGas ($MGNE) is up over 30% since you wrote your report in February, and Bona Film Group (BONA) and Neogenomics (NEO) are both up 15% since their respective reports. Do you think the successes you've had thus far can be viewed as an endorsement of your team and your approach to valuation and price targets?
Nicholas Bhandari:I think the advantage of our methodology is that it is much more quantitative in nature. That can certainly get you into trouble, but we try to balance it a bit. With Apple we just looked at the numbers and ignored what the street consensus was. Even when we pick a company we like, we're not going to simply buff our assumptions to get a good valuation.
We don't operate as sell side researchers – our income isn't generated based on the company liking us or even having access to their resources. We take a 100% independent approach to our analysis. The process is freeing on our side, and should provide solid research for the readers.
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