Apple is Cheaper than Woolies? – Looking at Price-to-Earnings Ratio

I was going to write about the impeachment farce in the US House of Representatives. But to do it justice, I’d need to write about 5,000 words.

I’m pretty sure you’re not up for that.

I’m not sure I am either.

As Russia Gate morphs into Ukraine Gate, you’ve got to be more or less brainwashed by the establishment media to believe that these impeachment hearings are anything but a sad attempt by the Democrats to overturn an election result.

Why are they still going, three years after the election?

In my opinion, they know their deep and long-standing corruption will soon be exposed. From the Clinton Foundation to the siphoning of foreign aid for personal gain, it will all come out.

Maybe that’s a case of wishful thinking over rational judgement. Time will tell on that front. But I do know that there has been a lot going on behind the scenes to expose this corruption.

I also know that the market doesn’t give a hoot about these political shenanigans. This tells you all you need to know. If the risk of impeachment were serious, volatility would be much higher.

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Instead, the US equity market is at new highs and refuses to go down.

When it doesn’t put in a solid advance, it ekes out a small gain.

This creates a ‘throw in the towel’ mentality. The bears give up. They’re sick of being cautious as the market rises relentlessly.

I’m not talking about the permabears. There are some who will never be bullish about this market.

I’m talking about the average investor trying to do something with their capital. Or the speculator who is impatient and wants to make money now.

This impulsive money comes into the market and creates a short-term top.

Whether we’re at that point now, I don’t know. But I think we’re close.

I say that because yesterday I received a text from an old friend asking if there were any stocks I like the look of at the moment. Hmmm…

He never texts to ask about stocks.

So that’s a red flag right there.

In short, I think stocks are stretched short term. A good example is Apple Inc. [NASDAQ:AAPL]. It’s the driving force behind the rally in the NASDAQ. As you can see in the chart below, the recent rally has been relentless.

S&P/ASX 200 FInancial-x-Property Trust - XXJ (ASX) - 1 Day Bar Chart - AUD - 28-10-19

Source: Optuma

[Click to open in a new window]

Not convinced the stock is stretched?

Take a look at a longer-term view…

S&P/ASX 200 FInancial-x-Property Trust - XXJ (ASX) - 1 Day Bar Chart - AUD - 28-10-19

Source: Optuma

[Click to open in a new window]

It shows a near vertical rise since September. The last few times that’s happened you’ve seen a sharp sell-off result.

Since the start of the year, AAPL is up a whopping 86%. We’re not talking about a small-cap stock here. This is the largest stock in the world!

Don’t get me wrong though. While I believe a correction is imminent, a major crash is very unlikely.

You see, AAPL isn’t very expensive. This isn’t the dotcom bubble.

How is Apple cheaper than Woolworths shares?

Remember yesterday I showed you a rough valuation of Woolworths Group Ltd [ASX:WOW] and Wesfarmers Ltd [ASX:WES]? Based on current market pricing, long-term investors are getting a return around 4%.

That’s not great if you’re looking to grow your wealth quickly. But for a super or pension fund looking for something other than a government bond yield paying just over 1%, it’s not bad.

How does AAPL stack up then?

Read on, you’ll be surprised…

Based on 2020 earnings forecasts, AAPL trades on a price-to-earnings ratio of 20.4 times. This is ‘cheaper’ than both WOW and WES. Moreover, AAPL only pays out 25% of earnings as a dividend. It reinvests the other 75%, meaning it is much more of a ‘growth’ stock than the Aussie consumer staples.

(As an aside, I’m not sure how AAPL reinvests its earnings. If it just sits in cash, or goes towards executive enriching stock buybacks, then the ‘growth’ aspect is somewhat of a mirage).

AAPL’s forecast return on equity (ROE) is an incredible 81%. This just tells you how dominant the brand is. No wonder that it trades at 15.3 times its equity value.

If you pay 15.3 x AAPL’s equity value, what are you really getting?

Well, you’re buying a company with an implicit long-term return of around 5.3%. (81/15.3). This doesn’t account for the compounding effect of reinvested earnings, so the actual prospective return is higher than that.

In a sane world, that might not seem like much…although it is better than our Aussie consumer staple stocks. But we live in an insane world where central banks are an investor’s best friend, and earnings never go down.

In the land of rainbows and lollipops, AAPL is therefore relatively good value.

So unless there is an earnings downgrade, or the Fed abandons investors, expect any correction in AAPL, and the US market in general, to be just that…a correction.

Regards,


Signature
Greg Canavan,
Editor, The Rum Rebellion

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Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

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