Why Is Apple Inc. (AAPL) Still Legg Mason’s Top Pick?

Page 1 of 2

Apple Inc. (NASDAQ:AAPL) remained Bill Miller’s top stock pick in the third quarter, leading us to believe that he sides with the company’s fundamentals, rather than the bearish technical arguments that many analysts are making at the moment (see Apple Will Hit $390: Analyst). Miller is the chairman of the Legg Mason Capital Management mutual fund and is considered a contrarian by most standards, one that looks for value-oriented opportunities. Miller focuses on buying cheap stocks and holding them over the long-term. Miller believes that excess returns – alpha – have little to do with accounting measurements of value – such as low P/E or price-to-cash flow ratios – and more to do with return on capital changes.

Bill Miller

Apple is down over 20% during the last three months and appears to be a value play when stacked up against its tech peers. Apple now trades at 12x earnings, below that of Google (22.5x) and Microsoft (15x). Apple should be able to excel this holiday season with a robust portfolio of new products – including the iPhone 5 and iPad Mini. On the sell-side, sales growth is expected to come in at 25% for 2013, then slow to only 15% in 2014, as Apple products continue to saturate their existing markets, though its worth mentioning that these estimates do not factor in the effects that a product like the Apple TV would have on sales.

Despite expectations of slowing growth, the long-term earnings growth rate for Apple Inc. (NASDAQ:AAPL) remains above that of other top tech investment options. Wall Street expects Apple to grow its EPS by 20% a year over the next half-decade, which gives its shares a paltry PEG ratio of 0.5. Google and Microsoft are more expensive, and sport more conservative growth estimates of 13.5% and 9% respectively. With over $120 billion in cash, there are many opportunities for Apple to unlock value for shareholders. These opportunities range from increasing its dividend – currently yielding 2% – to share buybacks and aggressive acquisitions.

JPMorgan Chase & Co. (NYSE:JPM) was another top pick of Miller’s, having moved up from Legg Mason’s third largest 13F holding to 2nd last quarter. JP Morgan pays the riches dividend yield among top banks at 2.8% and trades in line with other major peer Wells Fargo on a P/B basis – around 1.2x.

We believe that JP Morgan warrants a premium book valuation given its more diverse product offering, whereas Wells Fargo is heavily reliant on mortgage banking. A recent surge in refinancings lifted Wells Fargo to trading levels in line with JP Morgan, but the latter can continue its above average performance in its trading and investment management segments. With a doubling of his position, billionaire Ken Fisher – founder of Fisher Asset Management – also became one of the top fund owners of JP Morgan last quarter (see Ken Fisher’s latest stock picks).

Lowe’s Companies, Inc. (NYSE:LOW) moved into the top five and was Legg Mason’s 3rd largest 13F holding. Lowe’s trades in line with top peer Home Depot on a P/E and long-term growth basis, but Lowe’s is awarded a P/S that is nearly half that of Home Depot. Lowe’s has an equally impressive market position and is expected to open ten new stores in 2013, with same store sale growth of 3% next year. An uptick in housing starts next year should prove to be a key driver of this growth.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!