Taking Stock 8/16/13


Apple Adds a ‘Friend’

Tony Crowell
Tony Crowell

Apple stock got a price lift from an unexpected source. Carl Icahn, the famous corporate raider, announced he had taken a $1.5 billion position in its stock and intended to request a stock buy back in the hope of boosting its price. That was enough to take the stock up 40 points through $500, a level not sustained for a year.

Apple had already warmed up the crowd by announcing its newest iPhone will debut on September 10. Its pace of innovations had slowed, encouraging the impatient to sell out. Looking back, the short-lived pop to $700 last year was ahead of the game while its dip a few months later below $400 reflected irrational pessimism. $550 is the middle of this range and might be a short-term equilibrium point between these excesses.

Even though it’s trading 30% below its peak, Apple remains the world’s most valuable company with a current market value over $450 billion. It is hardly a company in trouble, particularly with its cash reserves of over $137 billion, but one that has grown through successful products to such size that its sizzling growth rates had to slow.

It trades at a quite reasonable 12 times earnings with a 2.3% dividend yield. Next year should see 9-10% earnings growth and a dividend increase. The Icahn news acted as a catalyst to unleash an undervalued stock. His intervention changed nothing about the company but could continue to develop a price floor for its stock. Apple is the largest position in the stock portfolios I manage for a number of convincing reasons and remains a buy.

Apple’s price fluctuations of tens of billions of dollars without any significant changes in its business illustrate the characteristic short-term sensitivity of stock prices to investor perceptions, often based more on emotion than calculated foresight. For a company with such financial strength, Apple’s price fluctuations over the last year also show its widespread ownership as well as the fickle nature of the market to perceived news developments.

This fickleness is unlikely to fade as we move toward a return to more normal business in the fall. Price volatility is returning, which invariably spooks investors.  One haven from price swings can be found in larger cap stocks. Apple certainly qualifies and its return toward more normal pricing is not really surprising. It just took a few favorable omens.

Asset managers like BlackRock (BLK-$269) and Blackstone (BX-$22) have performed well. I am adding Kohlberg Kravis Roberts (KKR-$20), an alternative asset manager with $500 assets under management. KKR made its initial reputation as the prime mover of the leveraged buyout. Its most famous venture was the 1988 LBO of RJR Nabisco, a record buyout at that time, and one that inspired Barbarians at the Gate, a popular book and TV movie.

KKR assumed substantial RJR debt, which took it several years to work off. The bursting of the dot.com bubble as the new century began caused heavy losses to LBO firms, eliminating some of KKR’s competitors. It persevered, scoring large successes with Toys “R” Us, SunGard, Dollar General and others.

In 2009, after the markets  were beginning to recover from the financial crisis, KKR listed 30% of the management company on the NYSE. These are publically traded partnership interests and probably more convenient to hold in retirement accounts. Its results have been strong with dividend increases for the past two years. The current yield is 8% and analysts estimate 2013 earnings around $2.30, a very reasonable P/E below 10.

After a strong beginning to the year, the market’s uptrend lost momentum as it wobbled through August. September, often a weak month, may bring more pressures on the uptrend. Another round of quarterly earnings and an improving global economy should accompany a traditional year-end rally.


Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

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