Hedge fund titan Bill Ackman has always been right about one thing: value investing. Widely considered to be the new Oracle of Omaha (a nickname for legendary investor Warren Buffett), Ackman didn’t build his reputation on high-risk investments or lucky guesses. Rather, it was built due to Ackman’s eye for simple, predictable, and cash-generative businesses. Most people know that shareholder activism can be a double-edged sword, enabling a company to rise towards success or plummet into bankruptcy; however, only bona fide pundits recognize the sheer competitive advantage of brand power — something that Apple has employed for years. This is why Ackman is smart to buy shares of Apple, and others should follow his example.
Following the release of the iPhone and the iPod, Apple soared through NASDAQ charts and quickly became the highest valued company in the world. Seemingly impervious to the ebb and flow of capital markets and consumer impressions, it wasn’t until the second fiscal quarter of this year that Apple took its first real blow. On April 26, shares experienced a 6% slide after earning releases failed to fulfill expectations.
But why did investors have such a bearish overreaction? The simple answer is public folly. The average investor fears the very whisper of future decline, so it really isn’t a surprise that investments are being guided away from Apple following Bloomberg’s and CNBC’s blabber. The foregone truth is these struggles in Q2 and Q3 fail to paint Apple’s whole situation; Tim Cook’s story is far from over.
Notwithstanding the company’s apparent future challenges growth prospects and revenue continuance, a few dips do not justify a market-wide selloff. For example, Apple has time and time again exceeded launch expectations of various hit products, like the iPhone and the MacBook.
To put things in perspective, iPhone sales have increased by over 17% in comparison to Q2 reports just two years ago. Such massive successes make it hard to achieve year-to-year marginal performances — which is exactly why 2016 is being deemed a general loss in comparison to last year.
Also, Apple stocks are traded at around ten times their earnings. This subsequently results in some of the most impressive cash flows on the market (not to mention their cash on hand, which is a massive $200 billion). But more importantly, it means that Apple is fully capable of returning its market valuation by maintaining revenue and through the repurchasing of Apple stock, as the company currently sits on over $200 billion cash. This should be a clear reason for investors to hold onto their Apple stock for dear life.
If anything, Apple’s tumble should signal an immense buying opportunity for most. In the words of Todd Gordon, founder of TradingAnalysis.com, “I’m going to use this weakness following a disappointing earnings report to acquire the stock.” The veteran trader’s opinion should be accepted as revelation, as the tech company’s quarter-over-quarter revenue decline should be seen as more of an opening.
Unfortunately, the majority of people were grounded in fears of further falls, which further plummeted the market cap by $40 billion by the end of the day.
Comparable to the workings of a nuclear bomb, one bad day was enough to ignite a messy chain of “chemical reactions” within after-market analysts. And when I say Wall Street came down on Apple, I really do mean the vast bulk of the finance community. Goldman Sachs even removed the tech giant from its Americas Conviction Buy List, a source of reputable information to many. But if Apple really is doomed, then why did Berkshire Hathaway just invest $1 billion more to his original $9.8 million share stake?
Berkshire Hathaway first disclosed their investment in the tech company back in the first quarter as part of a regulatory filing. However, since then, Apple has dropped significantly, with investors worried about slowing demand for the iPhone. But being the Oracle of Omaha, Buffett perceived the blatant opening for profit in the company’s temporary dip — a golden chance to show off a classic Warren Buffett move. Surprisingly, the legendary investor has avoided rising tech companies in favor of industrial companies in the past. However, Apple’s proficiency regarding the fundamentals of a great company has the man convinced of a future for i-products — something most Apple shareholders have lost faith in, despite all the other times the company has undergone periods of pain.
Through all of Apple’s ROIC and P/E reports, Buffett understands that there exists an opportunity for ideal value investing. Much like his younger counterpart Bill Ackman, he wholeheartedly believes that Apple still wields the ultimate trump card: brand power. Investors should continue to follow their lead and to invest in Apple stock.
