Investment Ideas Revisits: Netflix, Apple, Dell Over the past months we have published opinions on Apple (AAPL, Financial), Netflix (NFLX, Financial) and Dell (DELL, Financial). With this article we would like to revisit what we said about these companies.
Apple Inc. (AAPL)
At the end of 2010 we asked, “Is Apple Inc. Still a Good Investment?” We concluded that Apple seemed to be fair valued. Since we wrote, Apple stock gained 9%, only slightly outperforming the stock market.
Apple is one of the favorite stocks among hedge fund Gurus. Renowned hedge fund manager David Einhorn and the legendary Julian Robertson love the stock. It is also in the portfolios of a few tiger cub hedge fund managers. Details are here.
However, since the last article, we have observed more Gurus selling Apple. Julian Robertson’s Tiger Management has reduced holdings slightly. Tiger Cubs John Griffin of Blue Ridge Capital, Lee Ainslie of Maverick Capital and Steve Mandel of Lone Pine Capital all reduced their holdings.
Apple is probably still fair valued from our observation with the DCF calculation and the historical valuations. But the expectations from investors are high. Apple needs to keep growing at 30% a year in revenue, and expanding profit margins so that its profit can grow at 50% a year.
Apple is certainly a great company with a unique brand name. But with expectations as high as 50% growth for a company with the market cap of $320 billion in an extremely competitive market, we won’t bet on it.
Netflix Inc. (NFLX)
On Feb. 4 we asked, “Is Netflix a Good Short Candidate?” We concluded that it is hard to believe the P/E ratio of Netflix stock will continue to expand from 70, but it might not be a good short because the company is having tremendous growth and margin expansions.
Since we wrote, Netflix stock gained another 20% to $252 a share, while the market is up by only 2%.
We were right with the conclusion that Netflix wasn’t a good short. But the market proved that we were wrong for saying that the P/E ratio of the stock cannot expand from 70. Now the P/E ratio sits at 85.
Netflix was a short position of Whitney Tilson. He lost 25% with this short position and has since covered his short.
As of March 31, about 20% of shares of Netflix’s total float are short, slightly lower than a month before. It can be painful to see an overvalued stock become more overvalued for short sellers. Some of them have lost their conviction. Although at a 20% higher price, the stock is a better short.
Now we ask the same question again. Is Netflix a good short candidate at this point?
Still no!
Although Netflix stock is priced for perfection, any hiccups like those argued by Whitney Tilson will crush the stock prices. Therefore, it is still not a good short.
In his book “The Intelligent Investor,” Benjamin Graham told us not to evaluate a company by predicting its future business performance, but rather to look at its past business performance. A company’s business might not always follow its past trend, but it had its past performance for a reason. The past business performance is better than anything else for predicting its future performance.
Netflix business does have terrific past performance. To repeat, the company grew its revenue 27% a year in the past 5 years, its operating margin from 6% to 13%, and its earnings more than 40% a year. Will it continue its trend? It might not. But I wouldn’t bet against that until the real sign appears.
Before that, we would rather short those stocks from the companies that have declining profit margins and are sold at historical high valuations.
Dell Inc. (DELL)
On March 2 we wrote “Is Dell Inc. A Value Trap? An Easy Way to Avoid Value Traps.” Since then Dell stock underperformed the general market by about 3%.
We still believe that Dell is in the long-term trend of business decline. The recent improvement in profit margins might be unsustainable if the economy slows down again. Dell is certainly in good financial shape. The company has $9 billion of net cash so it can continue to buy back shares. The valuation is reasonable. With a long-term trend of business decline, Dell is a “fair company at good prices.”
Well, let’s find good companies at fair prices. Those are better investments, as Warren Buffett has told us many times.
A good place to start is the Buffett-Munger Screener, which is a screen for good companies at fair or undervalued prices. The model portfolio of Buffett-Munger gained 12.4% year to date after outperforming the market every year since inception. To access the details of the screen and the model portfolio, you need to become a Premium Member. If you are not yet, we invite you for a 7-day free trial.
Disclosure: No positions in stocks mentioned above.
Apple Inc. (AAPL)
At the end of 2010 we asked, “Is Apple Inc. Still a Good Investment?” We concluded that Apple seemed to be fair valued. Since we wrote, Apple stock gained 9%, only slightly outperforming the stock market.
Apple is one of the favorite stocks among hedge fund Gurus. Renowned hedge fund manager David Einhorn and the legendary Julian Robertson love the stock. It is also in the portfolios of a few tiger cub hedge fund managers. Details are here.
However, since the last article, we have observed more Gurus selling Apple. Julian Robertson’s Tiger Management has reduced holdings slightly. Tiger Cubs John Griffin of Blue Ridge Capital, Lee Ainslie of Maverick Capital and Steve Mandel of Lone Pine Capital all reduced their holdings.
Apple is probably still fair valued from our observation with the DCF calculation and the historical valuations. But the expectations from investors are high. Apple needs to keep growing at 30% a year in revenue, and expanding profit margins so that its profit can grow at 50% a year.
Apple is certainly a great company with a unique brand name. But with expectations as high as 50% growth for a company with the market cap of $320 billion in an extremely competitive market, we won’t bet on it.
Netflix Inc. (NFLX)
On Feb. 4 we asked, “Is Netflix a Good Short Candidate?” We concluded that it is hard to believe the P/E ratio of Netflix stock will continue to expand from 70, but it might not be a good short because the company is having tremendous growth and margin expansions.
Since we wrote, Netflix stock gained another 20% to $252 a share, while the market is up by only 2%.
We were right with the conclusion that Netflix wasn’t a good short. But the market proved that we were wrong for saying that the P/E ratio of the stock cannot expand from 70. Now the P/E ratio sits at 85.
Netflix was a short position of Whitney Tilson. He lost 25% with this short position and has since covered his short.
As of March 31, about 20% of shares of Netflix’s total float are short, slightly lower than a month before. It can be painful to see an overvalued stock become more overvalued for short sellers. Some of them have lost their conviction. Although at a 20% higher price, the stock is a better short.
Now we ask the same question again. Is Netflix a good short candidate at this point?
Still no!
Although Netflix stock is priced for perfection, any hiccups like those argued by Whitney Tilson will crush the stock prices. Therefore, it is still not a good short.
In his book “The Intelligent Investor,” Benjamin Graham told us not to evaluate a company by predicting its future business performance, but rather to look at its past business performance. A company’s business might not always follow its past trend, but it had its past performance for a reason. The past business performance is better than anything else for predicting its future performance.
Netflix business does have terrific past performance. To repeat, the company grew its revenue 27% a year in the past 5 years, its operating margin from 6% to 13%, and its earnings more than 40% a year. Will it continue its trend? It might not. But I wouldn’t bet against that until the real sign appears.
Before that, we would rather short those stocks from the companies that have declining profit margins and are sold at historical high valuations.
Dell Inc. (DELL)
On March 2 we wrote “Is Dell Inc. A Value Trap? An Easy Way to Avoid Value Traps.” Since then Dell stock underperformed the general market by about 3%.
We still believe that Dell is in the long-term trend of business decline. The recent improvement in profit margins might be unsustainable if the economy slows down again. Dell is certainly in good financial shape. The company has $9 billion of net cash so it can continue to buy back shares. The valuation is reasonable. With a long-term trend of business decline, Dell is a “fair company at good prices.”
Well, let’s find good companies at fair prices. Those are better investments, as Warren Buffett has told us many times.
A good place to start is the Buffett-Munger Screener, which is a screen for good companies at fair or undervalued prices. The model portfolio of Buffett-Munger gained 12.4% year to date after outperforming the market every year since inception. To access the details of the screen and the model portfolio, you need to become a Premium Member. If you are not yet, we invite you for a 7-day free trial.
Disclosure: No positions in stocks mentioned above.
