Apple: My Big Miss of 2013

“Forgetting your mistakes is a terrible error if you are trying to improve your cognition. Reality doesn’t remind you. Why not celebrate stupidities in both categories?” 

Charlie Munger

I'm sure Apple need no introduction, below is its stock chart from the past 2 years.

We can see the share price peak in Oct 2012 at just over $95 per share where Apple could do no wrong and was very popular with investors, attracting momentum traders. And why not, it had made people a lot of money and everyone liked their products.

Just six month later however, the share price had fallen 40% and found itself at $55 with worries of falling growth, shrinking margins and competition from the like of Samsung. Things would never be the same and Apples time had past. How quickly perceptions can change!

Those of you who follow Aswath Damodaran and read his blog Musings on Markets will know that he is a fan of Apple as a company and has regularity posted updates on his valuation of the company. He uses 'free cash flow to the firm' and discounts it to a present value to get a valuation of the stock.

In February 2013 with the share price at $440 ($63 at todays prices after 7:1 split) he wrote the following entry 'Back to Apple: Thoughts on value, proce and the confidence gap', discussing how, if at all, the share price would close the 38% to his valuation of $608.

What caught my attention was the following statement

"Thus, for Apple to be worth only $440 (or less), you would need negative or close to zero revenue growth, pre-tax operating margins of 25%(current margin is closer to 35%, down from 40% plus a year ago) and the cost of capital would have to be at 15% (the 97th percentile of US stocks)."

This was very interesting as it was a reverse-DCF calculation, determining what the assumptions must be to get the current share price. This for me rang a bell, the market was pricing in a very poor future scenario for Apple of no growth and higher risks. The downside risks had been considerably reduced and there seemed to be a margin of safety.

However, I still couldn't and didn't buy Apple shares......here is why, in no particular order.

1. I believed Apples future revenues would shrink because of competition.
2. I believed Apple would struggle to maintain its innovative competitive edge.
3. I felt uncomfortable in investing my own money.
4. The stock price had gone so high, I felt it had more to fall (although this turned out to be true!).
5. I was probably affected by the negative press.
6. I felt Apple's time as king of the hill was over.
7. Although it had low a valuation, e.g. P/E, I thought those earning were fragile and could easily erode away.
8. I don't like relying on someone else's analysis and conclusions for an investment.
9.The more it fell, the more I wanted to get it even cheaper yet wanted to somehow time the bottom tick.

Going back to the chart, the share price actually fell another 14% after reading that blog post, touching $54 twice before regaining ground and is now up 70% from those lows. Despite this big move Apple can still considered to be cheap based on earnings, free cash flow and shareholder yield.

Despite this, I still cannot pull the buy trigger (I blame anchoring bias!) and so continues my relationship with Apple.