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Yes, the Apple Cash Hoard Really Is That Big

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People come from all around the world to see Mount Everest. But if you lived in Nepal and saw it lurking in the distance every day, it might not seem nearly as impressive. You might take it for granted or even dismiss it as no big deal.

That’s really where we are today with Apple (AAPL) and the absolutely gargantuan Apple cash hoard. It’s been so large for so long that no one really pays attention to it anymore. In fact, it seems the most common thing I hear said about the Apple cash stockpile these days is that “it’s really not that big when you take debt and potential taxes into consideration.”

Frankly, that’s ridiculous. Even allowing for a massive tax haircut, AAPL’s cash hoard would rank as one of history largest treasures… a fortune that would make Croesus blush.

As of Apple’s latest quarterly earnings report, the company had $231.5 billion in cash and marketable securities. The Apple cash balance — the gross number, before any debt or tax considerations — would be the 13th-largest company in the world… bigger than Wal-Mart (WMT) and just a hair smaller than Procter & Gamble (PG).

Now, of course, the Apple cash is mostly overseas, while Apple’s $72.4 billion in debt is mostly domestic. Let’s pretend that Apple suddenly got religion and decided it wanted to be debt free… now. And let’s further assume that Apple wanted to move its entire cash hoard stateside because… go America!  And let’s take this one step further and assume that Apple is paying the full 35% U.S. corporate tax rate on the whole pile of money. (None of these are realistic assumptions, mind you, but let’s go through the exercise anyway…)

After taxes, Apple’s $231.5 billion in cash becomes $150.5 billion. That would still put the Apple cash hoard in the top 30 largest companies in the S&P 500… about on par with Phillip Morris International (PM) and just a hair smaller than IBM (IBM), Disney (DIS) and Pepsico (PEP).

After stripping out the $72.4 billion in debt, the $150.5 billion becomes $78.1 billion. That’s still not exactly chump change. In fact, that’s nearly double the average market cap of all S&P 500 and more than four times bigger than the median market cap of all S&P 500 companies.

And remember, this all assumes the absolute worst case scenario for taxes. Were Apple to actually attempt to repatriate its cash, it would likely negotiate much better terms.

So, yes. The Apple cash hoard is a big deal, no matter how you slice it.

To read the full article, see Call the War Chest Waahmbulance!

Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management, a registered investment adviser in Dallas, Texas. As of this writing he was long AAPL.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Stocks That Are Fit for a President

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Photo credit Donkey Hotey

I wrote a tongue-in-cheek piece for InvestorPlace on 12 Stocks Fit for a President. The following is an excerpt:

We’re in the middle of a presidential election year, and what a campaign it’s been so far. It’s looking like our choices will be two of the most polarizing political figures in modern history. But no matter who wins in November, we all have to get up and go to work the next day.

We also have portfolios to manage.

So, in the spirit of the 2016 election, I’m going to propose a portfolio fit for a president. And by “fit for a president,” I mean that the stock shares its name with a former commander-in-chief.

This probably isn’t the most scientific way to build a portfolio. But can you credibly say it’s any more ridiculous as a basis for investment decisions than the Hemline Indicator, the Super Bowl Indicator, or the Bangladeshi Butter Indicator?

Alas, Donald Trump’s companies are not publicly traded, and there’s no public company with “Clinton” in its name. Though there is a Sanderson Farms (SAFM), so perhaps the market is telling us to expect a Bernie Sanders upset in November.

Hail to the Chief … I guess.

Presidential Stocks: Washington Real Estate Investment Trust (WRE)

George Washington is the father of our country, the leader of our war of independence against Great Britain and our first president. He’s also the only person to be elected to the presidency with a unanimous vote of the Electoral College.

I’m not sure what President Washington would think of our nation’s capital, which bears his name. But as a successful businessman, he’d know a good profit opportunity when he saw it. If there is one sure bet in this life, it would be that the government will continue to get bigger. And as government grows, so does the city that supports it.

Washington REIT (WRE) is a real estate investment trust that focuses on office, retail and apartment properties in the Washington DC area. It’s a small-cap REIT with a market capitalization of just $2 billion and a respectable dividend of 4.1%. George Washington himself preferred to invest in farmland, but you could do a lot worse than Washington DC real estate.

Presidential Stocks: Carter’s Inc. (CRI)

Poor Jimmy Carter gets even less respect than Gerald Ford, whom he succeeded as president. Carter’s presidency was best remembered for runaway inflation, the Iranian hostage crisis, and that unfortunate sweater he wore during a fireside speech encouraging Americans to turn the thermostat down. But Carter wasn’t all bad. Some of the reforms and deregulation that Reagan is known for actually started under Carter’s administration. Whether Carter is actually smart enough to appreciate the pro-business accomplishments of his presidency is debatable, however.

Regardless, Carter’s, Inc. (CRI) is a stock you ought to keep on your radar. It’s one of the biggest makers of baby clothes in the world. That hasn’t been a great business to be in lately, as American births have been trending downward since 2008. But with millennials starting to enter their family formation years, I expect Americans births to start ticking up again, and soon. And when they do, you can bet that you’ll see a sustained bump in sales for Carter’s and its peers.

You can read the rest of the article… and all 12 presidential stocks… here: 12 Stocks Fit for a President

Disclaimer: I built a portfolio of 12 stocks with no other criteria than sharing a name with a past president. This is a spoof. For crying out loud, please do not consider this serious investment advice.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Apple STILL so cheap, it’s actually ridiculous…

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I wrote earlier this year that Apple is so cheap, it’s actually ridiculous. I still feel that way, and after a lousy start to the year, the market seems to be coming around to my view. Apple (AAPL) shares have enjoyed a nice rally of late, and I expect a lot more to come. Excluding the oil sector, Apple is one of the cheapest large companies in the world, trading for half the market’s earnings multiple, and sits on a mountain of cash large enough to pay its dividends at current levels for the next ten years… even if Apple were to never earn another cent of profit.

At any rate, Barron’s had an interesting take on Apple this week (see Jack Hough’s  Why Apple is Worth $150 per share.)

Hough’s basic argument is that Apple should not be priced as a high-growth tech company. Instead, because of the stickiness of its ecosystem, it should be valued more like a cable TV company. As Hough writes,

Maybe it’s time to start measuring Apple against companies with similar financial attributes, rather than smartphone sellers. Based on a survey, Needham analyst Laura Martin, who initiated coverage with a Strong Buy rating on Tuesday, calculates a yearly customer churn rate of 12% for the iPhone ecosystem, or an eight-year average stay, on par with cable companies. Applying a cablelike valuation to Apple would put shares at about $180. Martin expects the stock to move toward that level over time, beginning with a rise to $150 over the next year.

I agree, and I would add that these figures are close to Carl Icahn’s target of $200 per share.

I don’t do precise price targets. But I know a cheap stock when I see one, and Apple fits the bill.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long AAPL.

Photo credit: obihirorabbit

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Bond King Speaks

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Barron’s did an interview with Bond King Bill Gross in this weekend’s issue (see “Why Interest Rates Must Rise.”) While I find his incessant Fed bashing to be tiresome, Gross is still a living legend, and I take his views on market seriously. Here are a few nuggets from the interview I liked.

On running an unconstrained bond fund:

A manager of an unconstrained fund not only has more choices, but has to accept more risk. The unconstrained universe was born six or seven years ago from the idea that interest rates would bottom at some point, and bonds no longer would provide a decent return; in fact, returns might be negative. From conception, these funds were relatively neutral, duration-wise. To the extent that duration is minimized, a greater emphasis must be put on other elements of return, including credit, volatility, currency, and liquidity.

 

On the role demographics will play in the future:

Structurally, demographics are a problem for global growth. The developed world is aging, with Japan the best example. Italy is another good example, and Germany is a good, old society, too. As baby boomers get older, they spend less and less. But capitalism has been based on an ever-expanding number of people. It needs consumers.

Another thing happening is deglobalization, whether it’s Donald Trump building a wall to keep out Mexicans, or European nations putting up fences to keep out migrants. Larry Summers [former secretary of the Treasury] has talked about secular stagnation, or a condition of little or no economic growth. At Pimco, I used the term “the new normal” to refer to this condition. It all adds up, again, to very slow growth. The days of 3% and 4% annual growth are gone.

Interestingly, Gross and I are fishing in some of the same ponds, buying closed-end funds and mortgage REITs:

Nuveen Preferred Income Opportunities fund (JPC) holds bank preferred stock, and sells at a 6% discount to NAV. It is preferable to a large preferred-stock ETF because the mild use of leverage produces a higher yield. JPC currently yields 8.5%. I also like the Duff & Phelps Global Utility Income fund (DPG). This is a global utility-stock closed-end fund trading at a 14% discount to net asset value. It yields 9.2%.

Another example of letting others borrow for you is Annaly Capital Management (NLY). Annaly and American Capital Agency [AGNC] are bank-like real estate investment trusts without a bank infrastructure. Annaly is levered four to six times—less than banks, which are levered eight to nine times—and invests in government-guaranteed mortgages. It borrows money in the overnight repo [repurchase agreement] market. It yields about 11% because of leverage, not risky assets. The concept, again, is letting corporations borrow for you to produce a return higher than the 1% to 2% return the bond market gives you today.

 

Disclosures: As of this writing, I was long NLY.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Gold: Hedging for WHAT, Exactly?

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After looking dull for years, gold is finally sparkling again. With the market in convulsions and Fed Chair Janet Yellen broaching the possibility of negative interest rates, the yellow metal is up about 17% in 2016.

Hey, I get it. People are scared. And justifiably so. Frankly, I’m a little scared about where all of this is going. But before you run out and fill up the truck of your car with precious metals (and perhaps canned goods and ammo) let’s look at gold with a cold, analytical eye. Gold could go a little higher from here. It certainly has momentum at the moment. But if you’re looking for a true crisis hedge, gold isn’t it.

Gold is less of an investment and more of an emotional ideology. Investors, and male investors in particular, have an odd way of developing feelings for the assets they buy. Just as sailors have for centuries given their ships a woman’s name, many men get possessive about their stocks. If you insult it, you might as well be insulting his wife or mother. But with gold, the attachment goes even deeper. Being a “gold bug” is not just a matter of passionately believing in the investment merits of gold. It is an identity and one that exhibits many of the characteristics of a radical political movement or even a religious cult. (There is a fundamental belief:  Gold is the “one true store of value” or the “one true currency” and all imposters are heretical.)

Don’t be that guy. No one wants to be that guy. He’s a buzzkill at parties and way too intense.

But I digress.

Let’s strip away all ideology and try to look at gold fairly on its own merits. I would argue that the “barbarous relic” does indeed have its uses but that it’s still the wrong hedging assets to own in this market. Let’s break down the arguments in favor of gold:

#1. Gold is an inflation hedge. Ok, I don’t necessarily argue with this point. Over the years, gold has indeed proven to be a decent inflation hedge. Now, I might argue that real estate is a superior inflation hedge and also has the additional benefit of paying current cash flow in the form of rental income. But I’ll go ahead and cede this point to the gold bugs.

The big problem here is that an inflation hedge is only valuable when you actually have inflation. And right now, inflation is in short supply. In fact, with crude oil prices still looking wobbly, consumer price inflation is under 1%.

A lot of Americans have been fearing that rampant inflation is right around the corner due to excessively loose monetary policy. Well, the logic seems straightforward enough. But you could have made the same arguments about Japan at any point over the past 20 years, and you would have been wrong. All the monetary easing in the world will have little impact on inflation at a time of aging demographics and hobbled banks, which is where we are today. And in Japan, they’re still fighting outright deflation.

So yes, if you’re buying gold as an inflation hedge, you are effectively buying expensive insurance for a risk you don’t need to insure.

#2. Gold is a crisis hedge. I’m a little more sympathetic to this view. I’m a big believer in having a true zero hedge in the event the world really did go to hell in a hand basket. So yes, having a little gold bullion buried in the backyard, along with a good supply of shotgun shells, isn’t the worst idea. (I’m from Texas. We’re all nuts.)

But as far as safeguarding a portfolio, I’m less convinced of gold’s value as a crisis hedge. When the world gets truly shaky, investors tend to flock to the U.S. dollar and to U.S. government bonds rather than to gold. In fact, the price of gold actually fell during the 2008 meltdown, and I would expect more of the same in the event of another global crisis.

So, by all means, keep a few gold coins stashed away somewhere safe… just in case. But don’t overload your investment portfolio with the stuff.

#3. Gold is a store of value. Sure, gold is a store value. Sometimes. But there can be long stretches of time when it isn’t. Throughout the 20 years of the 1980s and 1990s, gold lost value almost every year. And the perception of gold’s value is purely subjective. Gold pays no interest or dividends and has little in the way of commodity value outside of modest use in electronics and dentistry. So assigning a value to gold is just about impossible.

My advice? If you are hell bent on owning hard assets, choose something that generates income, whether it is a rental house, a commercial building or even a piece of farmland. In a deflationary economy, none of these will have much in the way of price appreciation. But you’ll at least collect rental income along the way and you’re a lot less likely to have your judgment impaired by the politics and ideology that tend to swirl around gold.

This piece first appeared on Economy & Markets.

Photo credit: Bullion Vault

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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