Streetwise

Lauren Rudd

Sunday, August 12, 2012

An Apple a Day...

The din of the naysayers and prognosticators on Wall Street is deafening, resulting in a flourishing contagion of economic and financial hysteria.  Unfortunately, this state of affairs will likely continue until the upcoming presidential election and maybe well after.

In over four decades of working with the Street, I cannot recall such a girth and width of scandals that run the gamut from the Libor abomination to the latest problems at Knight Capital and London’s Standard Chartered bank. Stir in the difficulties facing the European Union combined with our own little “fiscal cliff” debacle and you have quite the soup.

The economic precipice we have faced for the past several years and continue to face, is indisputable. Yet, without the unprecedented actions orchestrated by the Federal Reserve the Great Depression of 1929 would be relegated to tea party status, no pun intended.

The current administration did not invent the budget deficit or the national debt. And while increasing both was and is distasteful, no other course of action was or is feasible, unless of course you have a penchant for bread lines and people with tin cups selling pencils on street corners.

Tragically, many seem to think there is no logical justification for the elderly to spend their days idly enjoying their golden years when they could be spending them working at the Golden Arches, or greeting customers at Wal-Mart, thereby reducing the Federal government’s burden.

The unresolved European debt saga, the so-called "fiscal cliff," and the tension surrounding the upcoming presidential election are wild cards and could push the markets in either direction. Deteriorating corporate earnings and the sluggish economic growth, here and abroad, are all valid concerns.

Yes, fundamentally oriented market strategists have been worrying about the slowdown in earnings and fretting about the fiscal cliff, the dual expiration of tax cuts at year end and automatic spending cuts. Some say it will hit the stock market much like last summer's deeply partisan congressional feud over the debt ceiling.

Yet stock prices are riding a wave of momentum to a near four-year high with the S&P 500 index above 1,400 for the first time since early May. While the markets are currently being supported by the prospect of more Fed easing, both semiconductor stocks and small caps seem to have found a floor. Small caps are economically sensitive, meaning that the bearish apocalyptic mood is being priced out of the market as we evolve toward a more bullish investment environment.

And stocks could continue to move higher as the market looks past current problems. Keep in mind that Wall Street is a forward looking indicator and right now the markets are contending with the last week in January and first week in February of next year, a point in time when we will be past both the election and the fiscal cliff issues.

So what do you do? One way to improve your self-reliance in this environment is to maintain a solid investment strategy. To that end let me suggest you consider Apple, a company that I have the highest respect for. By Wall Street metrics, Apple recently reported a disappointing quarter. Revenues, earnings per share, iPhone units, iMac units, gross margin and next quarter guidance were all lower than anticipated.

Street expectations were for $37 billion in revenues and earnings of $10.40 per share. Apple delivered $35 billion in revenues and earnings of $9.32. Yet Apple still chalked up its third best quarter ever.

In my opinion, Apple continues to be an attractively valued stock. I will explore the company in more detail in a future column. For now let it suffice that the intrinsic value of the shares using a discounted earnings model with a growth rate of 15 percent and a discount rate of 15 percent is $765. The more conservative free cash flow to the firm model yields an intrinsic value of $1,700. The shares recently closed at $619.86.

My earnings estimate for fiscal 2012 is $43 per share and $53 for fiscal 2013, with a 12-month projected share price of $711 for a 15 percent capital gain.