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

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
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

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

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 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!