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Brian Rogers Changes His Mind on Apple at Lower Valuation

December 02, 2013 | About:
Holly LaFon

Holly LaFon

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Back in March 2012, when many firms were cashing in on Apple (AAPL)’s astronomical growth, Bloomberg noted that the stock was “conspicuously absent” from Brian Rogers’ portfolio. Rogers, the chairman and chief investment officer overseeing $500 billion at T. Rowe Price, responded at the time that Apple was not right for his firm’s value funds. A little while later, he did an about-face on the stock, taking a large position and adding shares as recently as the third quarter.

2012

When originally asked in March about Apple, Rogers quipped: “I figure there has to be someone in the world that doesn’t own Apple, and it may as well be me.” Then he added, “Our firm is a very large investor in Apple. Our value funds, one of which I manage, are not investors in Apple. So I think there’s a little bit of a disagreement in terms of price and valuation and our growth funds have hit the ball out of the park on Apple, and our value funds have opted to invest in cheaper situations. So, we like Apple as a company – that’s T. Rowe Price’s view – but our value portfolios have tended to invest in other types of equities.”

At the time, Apple’s stock price was around $536, heading toward its all-time high reached in September of over $700, and up over 52% from a year previously. It also traded with a P/E of 15.28 and P/B of 5.55, both on their way down.

Price:

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P/E and P/B:

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Buying

In 2013, Rogers may have believed Apple looked much more like a value stock. He waited to pull the trigger on Apple until it sunk to some historical-low valuation points. His entrance point, the first quarter of 2013, saw the price plunge to 52-week lows – down as much as 20% over the quarter and almost 40% from its September high. Rogers initiated a position of 325,000 shares at the quarterly average price of $466.

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The first quarter also saw Apple fall to more than 10-year low P/E ratios, dipping into the single digits in March:

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Its P/B ratio declined to around its lowest point since about 2005:

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In his semi-annual letter to investors, Rogers commented on his decision to buy Apple finally:

“We initiated positions in Apple (AAPL), Joy Global (JOY), Hospira (HSP), and Western Union (WU), all of which had stumbled in the eyes of investors, resulting in sharply falling share prices before we decided to invest in them. Consequently, the companies' stock valuations became more attractive to us. We normally favor companies whose share prices have declined because of cyclical worries, sector concerns, or company-specific issues. When a stock falls in value, its price/earnings ratio usually declines while its dividend yield increases, characteristics we look for as value investors. The strategy can be rewarding as long as the company's fundamentals are still sound.”

Indeed, the decline of Apple’s share price benefited its dividend as well. Its yield jumped from under 1% at the end of 2012 to almost 2% in the first quarter of 2013, and to over 2% by the second quarter.

Apple’s Stumble

Apple’s “stumble in the eyes of investors” Rogers mentions in its fiscal 2013 first quarter occurred on a number of counts. The company missed analysts’ revenue and device shipment estimates, and reported its first period of earnings declines in nearly a decade. Its gross margin also declined year over year to 38.6% from 44.7%.

The results included several company records, however. Apple beats its own revenue forecast, reporting a record $54.5 billion, along with a record $13.06 billion in net income, or $13.81 per share. iPhone sales reached a record 47.8 million devices, while iPad sales soared to a record 22.9 million. The company ended the quarter with $137 billion in cash.

Going Forward

Rogers has continued to acquire Apple shares, though at a lower rate as the price recovers this year. He bought 225,000 in the second quarter and 100,000 in the third quarter. In total he holds 650,000 shares, which represents 1.2% of his almost $26 billion T. Rowe Price Equity Income Fund portfolio. The share price has increased 3.5% year to date and 22.6% over the recent six months to $551 per share, giving him an average gain of 22% on the holding.

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The company is also trading with a P/E of 14, P/B of 4.05% and dividend yield of 2.12%. Unless he has sold in the fourth quarter, Rogers likely still sees further room for growth in Apple’s stock. As he says in his third quarter letter, he usually sells when “a company's rising stock price makes its relative valuation less compelling.”

Rogers’ other picks from the Computer Hardware sector are Agilent Technologies Inc. (A), Corning Inc. (GLW) and Dell (DELL), none of which he added to in the third quarter.

For more Brian Rogers stocks, visit his portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Brian Rogers.

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