The price of Apple shares continues to puzzle pretty much everyone. As it is a high-profile company that is considered a “brand giant,” it’s expected that everyone would assume that its shares command considerable cost. Surprisingly, this does not seem to be the case — and we can’t seem to decide whether it’s a good thing or a bad thing.
The Finer Points of Pricing Stocks
In “Apple is grossly mispriced,“ a feature published on the investment research platform Seeking Alpha on April 1, 2016, buy-side analyst Erik Bergseng noted, “No matter which way you cut it, Apple (NASDAQ:AAPL) is grossly mispriced.” He added that “even if we assume the worst and revenues stagnate or even slightly decline,” the fact remains that Apple “is still a phenomenal investment because it is so pessimistically priced.”
Before we delve further into why Apple stocks are mispriced, let’s take a quick look at the metrics that are employed by financial analysts to relate price-to-fundamental financial data. An Investopedia entry lists the following:
Price-to-earnings ratio (P/E ratio) – This measures the price of a stock relative to annual earnings per share (EPS) generated by a company.
Price-to-book (P/B) ratio – This is used to show how much a company’s valuation is generated by its book value, which refers to the value of a asset as entered in a company’s books.
Enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio – This is used to compare companies with different capital structures or capital spending requirements. This is especially useful in assessing firms that operate in different industries.
Yield analysis – This is is commonly employed to express investor returns as a percentage of the price paid for a stock. This “allows the investor to conceptualize pricing as a cash outlay with potential for returns.” Investopedia further explained: “Dividends, earnings and free cash flow are popular types of investment returns and can be divided by the stock price to calculate yield.”
In his analysis, Bergseng highlighted the difference in P/E between Apple and the S&P 500. He stated, “Again, we see the P/E disparity here is making 10-year lows. In other words, Apple has not been so pessimistically priced relative to the market in the past 10 years.”
Bergseng’s observations aren’t anything new. For at least a couple of years now, other industry pundits have pointed out the baffling detail.
In 2013, Suzanne McGee — in her article in The Fiscal Times — pointed out that the price of Apple shares have not soared even when the company products are practically flying off the store shelves. “In spite of all that enthusiasm – or downright mania – Apple still changes hands for less than $500 a share, well below its record high of nearly $700, and is trading at about 12 times trailing earnings,” wrote McGee.
However, not everyone is convinced that Apple shares are mispriced. Bram de Haas, in his Seeking Alpha article, “Apple: Be Careful,“ stated that he was presenting a “rebuttal of a fellow contributor’s dangerously optimistic view of Apple’s future.”
De Haas noted: “The past decade of Apple’s performance and the growth rate it resulted in should not be mistaken to be easily repeatable or as a normal kind of growth rate.” He added, “Ten years ago Apple started its global expansion, now nearly everyone who can afford an iPhone has one. The iPhone, a miraculously successful product, was introduced in 2007. For the first time since that introduction there is widespread talk of [the] peak iPhone.”
In other words, De Haas is asserting that there will come a point when Apple “starts to lose scale and/or is forced to introduce a larger number of products to generate the same amount or even less revenue.” He concluded, “The market is correctly anticipating free cash flow falling.”
In any case, Mike Colagrossi, an analyst at ActivistStocks.com, anticipates a fruitful 2016 for Apple. He explained, “As an incredibly successful technology company, it’s hard to imagine that Apple’s price-to-earnings (P/E) ratio is where it is. Apple had a run in the $130 range earlier in 2015, but by the end of the year, share prices went down to the $105 level. 2016 could be a year that sees share prices rising as opposed to the stagnant year Apple had in the stock market in 2015.”
Colagrossi went on to say, “Apple needs to look towards the future and into a new market. As smartphones become more commonplace and saturated, it needs to find the next best thing. This could be virtual reality.” Aside from that, he also dicussed the possibility of Apple buying electric car maker Tesla or GoPro.
Moreover, Colagrossi said that Apple “can focus even more on entering these new non-Western markets and selling iPhones there.” The company’s other option, he said, is “to increase its reach on new products such as the Apple Watch and Apple TV.” The key, he emphasized, was for Apple to develop “products that entice consumers to need iPhones.”
With all the heavy lifting that needs to be done, we understand why the company isn’t losing sleep over its famously mispriced shares. Maybe we don’t have to tag it as a good thing or a bad thing. Maybe that’s just the way it is.
Trump Favors Larger Stimulus Checks, Says ‘Tremendous’ Market Crash if Biden Wins
In a wide-ranging interview with Fox Business News, President Trump mentioned his support for another round of stimulus checks and says should Joe Biden win the election in November, we should expect the stock market to crash “a tremendous amount.”
On Stimulus Checks
Speaking with Blake Burman, the president says he is in favor of another round of stimulus checks, but wants to make sure that there is a financial incentive for Americans to return to work.
“I support it, but it has to be done properly. I support actually larger numbers than the Democrats, but it’s got to be done properly. We had something where it gave you a disincentive to work last time. And it was still money going to people, and helping people, so I was all for that. But we want to create a very great incentive to work.”
Trump also mentioned he wants the checks to arrive quickly and spent quickly, without the Democrats adding complications.
“I want the money getting to people to be larger so they can spend it, I want the money to get there quickly and in a non-complicated fashion. And they wanted to make it too complicated, also it was an incentive not to go to work,” said Trump.
Returning to work is what hard-working Americans are looking forward to, says Trump, and he wants there to be a financial incentive to do so.
“You’d make more money if you don’t go to work. That’s not what the country is all about. And people didn’t want that. They wanted to go to work but it didn’t make sense because they make more money if they didn’t… we want people to get out and we want to create a tremendous incentive for people to want to go back to work.”
On Biden and Taxes
When asked about Joe Biden’s recently announced plans to raise corporate taxes if he becomes President, Trump said “You’re going to crash the market. 401(k)s will be down the tubes, the wealth of the country will be down.”
He added “That will kill the market. It will kill everything we are doing, it will kill jobs, and it will be very bad. Frankly, the stock market is doing well, but it’s an overhang. If he got elected, and they say this, that’s an overhang over the market, because the market would crash. Would absolutely crash.”
When asked what he means by crash, Trump responded, “Markets would go down by tremendous amounts. He’d raise taxes, he’d raise regulations. Look, one of the biggest things I’ve done is I’ve cut regulations more than any President in history. We still have regulations, but they’re much less. His people, the people around him (Biden) are radical left. They’re going to raise taxes, they’re going to raise regulations, and they’re going to put everyone out of business. It would be a disaster.”
Fed to Keep Rates At Zero, Worried About Market Crash Later This Year
The Federal Reserve will keep rates at near zero percent for the foreseeable future. Also, a few members feel worried about a second wave of the coronavirus crashing the markets later this year. These are according to the minutes of the June 9-10 meeting.
Federal Open Market Committee members voted to keep the benchmark short-term borrowing rate in a range of 0%-0.25%. They also said that, until the economy “had weathered recent events,” they would keep it there. Without providing specifics, the notes also mention that “a number” of members believe there is a high probability of additional “waves of outbreaks” of the coronavirus.
This worry over additional outbreak waves and the economic damage it could bring led the FOMC committee to downgrade their economic outlook from the April meeting. The said meeting had predicted a more benign baseline forecast.
The members also indicated that they will begin providing the markets with stronger guidance about future interest rate moves. However, Fed watchers don’t expect the committee to begin providing this guidance any earlier than the September meeting.
“In particular, most participants commented that the Committee should communicate a more explicit form of forward guidance for the path of the federal funds rate and provide more clarity regarding purchases of Treasury securities and agency [mortgage-backed securities] as more information about the trajectory of the economy becomes available,” the minutes said.
Milestones and Metrics
The committee also discussed what milestones they will use to determine an appropriate time to start raising interest rates. When they did, the metrics proposed has split the committee.
In 2012 for example, the Fed said it would keep rates at zero until the unemployment rate fell below 6.5%. Alternatively, they also said it would keep zero rates until the inflation goes above 2.5%.
In June’s meeting, a “number” of members said any interest rate increases should be tied to the Fed’s 2% inflation target. Meanwhile, a “couple” favored using the unemployment rate. A “few” members suggested the committee set a specific date.
The FOMC also released its expectations for GDP over the next few years. The median GDP projection for 2020 was a contraction of 6.5%. A 5% increase in 2021 and a 3.5% in 2022 will follow this. However, they acknowledged “that there remained an extraordinary amount of uncertainty and considerable risks to the economic outlook.”
Trump on Powell
Meanwhile, there’s a bit of good news for Federal Reserve chairman Jay Powell. It appears he has slowly won over his most vocal critic, President Trump.
During an interview on Fox Business News, Trump said Powell has “stepped up to the plate” and he’s happy with Powell and Treasury Secretary Steve Mnuchin for the work they’ve done to help the economy recover.
“I would say that I was not happy with him at the beginning, and I’m getting more and more happy with him, I think he’s stepped up to the plate. He’s done a good job, he’s had to liquify a little bit, let us liquify, put out the money that you needed, and I would say over the last period of 6 months he’s really stepped up to the plate.
“I can tell you I’m very happy with his performance, and Steve Mnuchin, I think they’ve both done a very good job, they’re working together very closely.”
Here’s When You Can Expect Social Security Cuts
Social Security is a retirement cornerstone for tens of millions of Americans. According to the Centers for Budget and Policy Priorities, every year it keeps 15 million retirees out of poverty.
Unfortunately, the program is facing massive financial hurdles. It has been collecting a net cash surplus for the last 38 years. However, starting next year, it is projected to run a $21.1 billion net cash outflow.
The program entered the decade with a reserve of $2.9 trillion in assets. Although, many expect the net outflows to increase each year and chip away at the reserve by $1.1 trillion. This leaves the program with only $1.8 trillion in reserves by 2029.
The program isn’t facing bankruptcy or insolvency. Instead, it is more and more likely that retirees will soon face reductions in their benefits to keep the program afloat.
Two trusts actually make up Social Security. The first one is the Old-Age and Survivors Insurance (OASI) trust. It provides payouts to retired workers and survivors of deceased workers. The other is the Disability Insurance (DI) trust. This one supplies payments to workers that are long-term disabled.
When reporting on the state of the program, the Social Security Board of Trustees generally lumps the two trusts together. However, each trust is independent and faces individual risks.
Of the two, the OASI is projected to be in financial distress the soonest. The latest Trustee report estimates that the OASI will deplete its asset reserves by 2034. Meanwhile, the DI trust could possibly depleat its reserves in 2065.
But because the OASI is much larger than the DI trust ($2.8 trillion of the combined $2.9 trillion in reserves), the combined trusts are projected to become insolvent in 2035.
So expect the first major cuts to come in 2035 in an effort to avoid insolvency. Those efforts will involve a potential bitter pill for retirees to swallow.
Unless Congress finds a way to raise additional revenue and/or reduce outlays, retired workers and survivors of deceased workers can expect a 24% reduction in monthly benefits starting in 2035. While that seems a long time from now, it’s only 15 years away and will be here sooner than you think.
In real numbers, a retiree who receives the average monthly Social Security benefit of $1,503 today would see their monthly benefit reduced to $1,142 per month, or $361 less to live on. A married couple receiving $2,531 in monthly benefits would see their check cut by $608 per month, down to $1,923.
While the monthly reduction stings, looking at it from a lifetime benefit approach magnifies the worries for retirees trying to live out their golden years. A hypothetical worker who retires this year and starts receiving benefits would typically expect to collect about $500,000 in Social Security benefits. A 25% reduction means they would see their benefits cut by $120,000, down to only $380,000 in retirement benefits.
A married couple would see their projected $1 million in benefits reduced by $240,000 down to $760,000. That’s not an easily-replaced amount of retirement income.
If there is a glimmer of hope, it’s that Congress can take action to avoid – or delay – the day of reckoning. Yes, they’ve known since 1985 that the program would one day run out of money. But if there is one thing that the government is good at, it’s waiting until the last minute to really dig in and find a solution.
Let’s hope they can set aside their differences and put America’s retirees first.
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