Investors liked Apple’s latest earnings report, driving the stock from $525 to $600 (€379-€433). The big question, according to renowned valuation expert Aswath Damodaran, is why.
Damodaran, an Apple shareholder, valued the company at $649 prior to the earnings report and $648 afterwards.
There was nothing new; it reported low revenue growth and continued pressure on margins while the announcement regarding stock buybacks and dividends had little impact on Damodaran’s valuation.
The stock split? “Purely cosmetic”, and unlikely to significantly boost demand for a highly liquid stock like Apple. Might the increased dividends make investors feel more secure?
Is the stock buyback a signal Apple believes its stock is undervalued?
Perhaps, but “Apple has tried both moves before, with little success”.
Last August, this column referred to Damodaran's value of Facebook, which had seen its stock go from $38 to below $18 and back to $38.
His fair value model was little changed during that time, however, ranging from $24 to $27.65.
Apple appears little different; it's all a case of "investor psychology and market momentum, two forces that are immune to rationality".
Where have all the splits gone?
Apple aside, stock splits have become a rarity in recent years.
In the 1990s, an average of 64 S&P 500 companies split their stock annually, with one in five doing so in 1997.
Splits tend to occur in high-priced stocks, so that number fell after the dotcom collapse.
Still, it remained common to see about 40 stock splits annually, Credit Suisse estimates. Since 2008, however, an average of just 12 S&P 500 companies have done so each year.
The average S&P 500 stock is now valued at almost $80, roughly double that seen four years ago.
It’s peculiar. Splits are cosmetic – two $40 shares are, obviously, the same as one $80 share – but they can yield benefits.
Over the past three years, Credit Suisse found, every stock that split either popped or stayed flat, gains averaging 1.4 per cent. Trading spreads narrowed dramatically, averaging 35 per cent.
With both Google and Apple recently announcing stock splits, the practice may yet come back into fashion.
Betting the farm on home
It's never been easier to hold a cheap, globally diversified portfolio.
A recent Goldman Sachs note, however, indicates most investors couldn’t be bothered, preferring to bet the farm on their home market.
So-called home bias has fallen over the last decade but remains strong, with 76 per cent (previously 81 per cent) of domestic equity holdings in developed markets held by domestic investors.
In emerging markets, the fall has been even slighter, from 90 to 88 per cent.
This results in obviously lopsided portfolios. The US, says Goldman, accounts for less than 40 per cent of global market capitalisation, so investors should have 60 per cent of assets in international markets. Instead, they have 16 per cent.
In 2005, so-called ‘balanced’ managed funds were allocating 25 per cent of their money to the Irish market, which then represented just 0.3 per cent of the world index.
We all know how that turned out.
Social media stocks may fall
Twitter shares slumped 10 per cent following last week's earnings report and have now almost halved since December. Facebook, too, has suffered since reporting on April 23rd.
Both companies actually beat estimates, but that’s not enough when so much growth is already priced into the stocks.
How should you value young growth stocks? Market commentator Mark Hulbert notes a study of 1,700 US companies that began trading between 1996 and 2005, which found sales grew by an average of 212 per cent over companies' first five years.
The median US internet stock has a price-sales ratio of 5.87 on its fifth birthday, adds Hulbert.
To estimate where Twitter and Facebook may be in five years’ time, multiply expected sales by 5.87.
With both Twitter and Facebook, prices would be about 40 to 50 per cent below today’s levels.
Buyer beware.
Buying Yahoo for free
If growth expectations for Facebook and Twitter are heady, they appear non-existent for Yahoo.
How come? Haven’t shares soared 150 per cent since late 2012, valuing Yahoo at $36 billion?
Yes, but it has a 24 per cent stake in ecommerce giant Alibaba – that alone appears to account for all of Yahoo's market value (Alibaba is expected to be valued at about $150 billion when it floats in the coming months). Yahoo's 35 per cent stake in Yahoo Japan is worth another $10 billion, while it has $4 billion in net cash.
Selling the Alibaba stake has tax implications, of course.
Even accounting for this, however, investors are getting the core business for free, as some analysts have recently argued.
The market’s pessimism may be justified, but Yahoo looks a better bet than most of its overpriced internet brethren.
