Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Apple Inc. (AAPL)’s Capital Allocation Miss

Apple Inc. (NASDAQ:AAPL) investors have been in for a wild ride. As the market hits new highs, Apple Inc. (NASDAQ:AAPL) is finding new 52-week lows.

Some say its because of Apple’s transition to a value stock from a growth name. Others say its the on-going battle with David Einhorn about a preferred dividend straight out of a financial engineering book.

I think it’s just capital allocation, and nothing more.

Apple Inc. (NASDAQ:AAPL)

Where Apple missed

The belief that Apple Inc. (NASDAQ:AAPL) needs huge amounts of cash for investment purposes – primarily to buy new product – is folly. The company best known for the iPhone runs on negative working capital, selling its devices and collecting payments before it even begins to think about paying suppliers.

So much of the cash and securities Apple Inc. (NASDAQ:AAPL) owns are, as far as the business goes, completely dead weight.

More importantly, Apple’s holdings are dragging down the company’s potential performance. Investors should look closely into the latest quarterly report to see what Apple owns.

Here’s a snapshot:

What do you see? Poorly-performing security after poorly-performing security.

A simple allocation shift for a higher valuation

Fixed-income is a drag on investors who want equity exposure. While Apple’s stock price sank in the last six months, the company’s investments failed to keep pace with the rising tide of the equity markets.

Apple Inc. (NASDAQ:AAPL) could make things easier for investors who want equity returns: move money into equities. Let Apple’s cash sit in something more exciting than corporate bonds and mortgage-backed securities. At the end of the day, investors aren’t worried about the cash coming back as much as they’re worried about the company dragging down its business performance because of its poor investment habits.

Moving into equities solves three basic fundamental problems:

1. Increasing the return on the company’s retained earnings, which are currently being invested in low-return securities, dragging down the company while the market is up.

2. Satisfying investors demand for equity exposure without requiring the company to move cash back to the United States. The company’s “hedge fund,” Braeburn, was invented solely for the purpose of allowing Apple Inc. (NASDAQ:AAPL) to invest its overseas earnings in marketable securities without paying taxes to repatriate its building reserves.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading...