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 Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools 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!