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.
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.