During the second quarter, John Linehan, the manager of the T Rowe Price Equity Income Fund (Trades, Portfolio), purchased a 720,000-share stake in Apple (AAPL, Financial).
Apple designs, develops, and sells consumer electronics, computer software, and online services.
Apple has a market cap of $541.06 billion, a P/E ratio of 10.98, an enterprise value of $565.65 billion and a P/B ratio of 4.15.
According to GuruFocus, Apple has a 7/10 financial strength rating and a 8/10 profitability rating.
The company has an operating margin of 29.39%, which ranks it above 98% of the companies in the Global Consumer Electronics Industry. Apple also has an ROE of 40.05%, and three-year revenue growth of 19.50%, which ranks it above 89% of the companies in its industry.
On June 12, 2013, Linehan was interviewed by Steve Forbes. Linehan gives away some clues during the interview with regards to his investing strategies, and potential reasons why he may have purchased a stake in Apple during the second quarter.
Forbes: Now some investors believe you can just do it off of balance sheet spreadsheets. But you do it on the human side as well. The reason I ask is my grandfather, who founded our company, liked to say, “You’ll learn more about the prospects of a company looking at the head knocker,” that’s what he called CEOs, “than you will at the balance sheet,” i.e., people make the difference. You go whole hog in terms of getting to know CEOs, CFOs and the like more than most.
Linehan: Well, I’d agree with your grandfather. I think it’s incredibly important as an investor to understand who you’re investing with, what their motivations are. Balance sheets only tell part of story. At the same time, valuation, balance sheets, income statements, are interval to our investment process. But they’re only part of the story and they’re not the full mosaic.
Forbes: So how do you make good picks among equities that are most of these are pretty well followed. It’s not as if you’re going into an area that few look at and therefore low-hanging fruit. Everyone’s looking at these things, it seems.
Linehan: I think you have to start with the common sense approach in which you’re looking for companies where you think you have an attractive fundamental backdrop. That really is leveraging the work of our research platform. Then on top of that you really have to look for companies where there’s some stress or controversy or some factor that’s affecting sentiment. And if you can buy good companies that are trading with bad investment psychology or bad investment sentiment and you believe that over time that that controversy can be corrected, those are the companies that we really gravitate towards.
Forbes: Now a company that looks cheap. Apple. But you haven’t take a bite yet.
Linehan: I’d say in the fund that I co-manage, we have not taken a bite. As a firm we own a fair amount of Apple.
Forbes: Your technology funds.
Linehan: And also a number of our growth funds and core funds. I would say with Apple, there’s a very interesting paradox that’s occurred. You know, on the bear case for Apple is the innovation gap, which has really fueled the stock price surge, has narrowed dramatically. If you look at the Samsung Galaxy phones, there’s a convergence between what that product offering and the Apple iPhone offering. Without a fair amount of innovation lead it’s difficult to see the company continued to do well.
Apple has a very significant share of the revenues or the wallet share in this space. That’s difficult to maintain unless they have products out there that people want. I think the bull case for Apple is, while they have a significant amount of their revenues, they actually don’t have a significant amount of the market.
If they can continue to grow the market even through lower product forms such as the iPad mini or a lesser version of the iPhone 5, that over time, creating that user base and creating an ecosystem will, much like Microsoft back in the ’80s and early ’90s, create a dominant position from which they can drive price and power over time. There’re strengths to both arguments. And with them our product we’re spending a lot of time really trying to distinguish and make a decision on the company.
It is possible that Linehan decided to purchase a stake in Apple for the following reasons:
- Apple has a strong balance sheet, it is trading well below its intrinsic value and the market price has been in decline over the previous year.
- The CEO of Apple is Tim Cook. He is a vigilant leader who had the opportunity to learn from Steve Jobs before he passed away in October 2011.
- Linehan may also be speculating that the new iPhone 7, which is rumoured to be released later this year, could potentially drive up sales and revenues.
Below is a Peter Lynch Chart that shows Apple is trading below its intrinsic value.
In conclusion
Linehan looks for companies with strong balance sheets, good products that can drive up sales and strong revenues. Apple fits into Linehan’s criteria as a solid growth investment and it is also trading below its intrinsic value. All of these factors likely had an impact on Linehan’s decision to purchase shares of the company during the second quarter.
Cheers to your investment success.
Disclosure: Author does not own any shares of Apple.
