The top 4 stocks in my portfolio are Apple, Google, General Motors, and Fiat Chrysler. Apple is 23%, Google is 18%, and General Motors and Fiat Chrysler are both 11%. I like holding a lot of cash, and the above percentages are just of the stock portion of the portfolio, they don’t reflect the cash holdings. So the actual allocations are smaller. But of the stock portion of the portfolio, Apple is up to 23% so I think it’s a good time to reevaluate the position. Should I sell, buy more, or hold?
In general, I like to hold on to the truly great companies and not sell them, even after they appreciate in value and become a large percent of the portfolio. I like to hold on to them with the plan of holding them forever, or until we see either some decline in the business or another better opportunity comes along. So my inclination is to hold and enjoy being an owner of one of the greatest profit-producers in history.
I first bought Apple for $94 a couple years ago, and I’ve been buying at various more expensive prices since, including $191 recently. So I’ve had a good result with this investment, and many people would sell and “cash in” at this point, but I don’t invest that way, and I’m inclined to hold for a very long time, as I mentioned above.
But to reevaluate, let’s start with Munger’s 4 item checklist. In an interview with the BBC a few years ago, he went over the 4 items he and Warren focus on when buying a business or stock.
1. Understand the business. Circle of competence.
2. Durable competitive advantage. The moat.
3. Management with integrity and talent.
4. A price that makes sense with a margin of safety.
Circle of competence.
Yes, Apple is within my circle of competence. Like almost everyone in America and the developed world, I use my smartphone for a large period of time throughout the day. I’m very familiar with the iPhone product, Apple’s other products, the grow-services strategy, and their balance sheet. I’ve read the Steve Jobs biography, I’ve read through annual reports, and I follow the company very closely in the news. Apple is squarely inside of my circle of competence, with perspectives as an owner and a customer.
Apple’s moat around the iPhone is strong. Once you’re in, you’re in. The churn rate from Apple and Android, and vice versa is small. All your apps and services are in your iPhone world, and there’s no real reason to put yourself into the hassle of changing the kind of phone you use. It’s a very sticky product. You just upgrade every few years when you need a new phone, the purchase price gets spread out over many months on your wireless bill so you don’t feel how expensive it really is, and in the interim you have many opportunities to pay Apple service revenue for various paid apps and things like Apple Music. It’s a tremendously sticky product.
There’s two major threats to the iPhone’s moat. One, some kind of radically new technology. Nokia ruled the day once, then Blackberry, and now iPhone. Something new always comes along. But there’s nothing in sight right now. And when that new product comes that makes the iPhone obsolete or much less valuable, hopefully I’ll see it long in advance and make a decision to get out before the decline. But as of now, there’s no radically new technology in sight.
The other major threat, in my view, is China. From time to time I read about the Chinese phone makers and I get nervous. I fear their ability to one day produce a phone that is almost as good as the iPhone, but costs drastically less… like 80% less. If that ever happens, Apple would be in trouble. But as of now, it’s not a problem. I don’t think the United States government even allows Chinese phones to be sold in the United States because of security issues. And even if they did, Apple’s brand and ecosystem is so strong that it could take years and years for the Chinese to make a dent into Apple’s market share. But an almost as good, much cheaper phone from China is one of my long term concerns.
I think Tim Cook is the number one most qualified person on the planet to be running Apple. I think he’s proven that over the last few years running the company, so he’s talent-wise the right person for the job and he’s shown no signs of being non-trustworthy. On top of understanding how to run Apple, he understands capital allocation and is smart with dividends and buybacks. And he’s got Buffett as a major shareholder as a sounding board on capital allocation issues, if he’s inclined to ask. I think the management in place is great and couldn’t ask for a better team.
A Price That Makes Sense
Here’s where it gets interesting. Apple is up about 33% over the last year and it now has a market cap of $1 trillion. But if you look at the fundamentals, it doesn’t seem overpriced.
The PE is 19 versus an S&P 500 PE of 24. And the forward PE is 15. The dividend is 1.26% and the payout ratio is only 24%. The company is in the process of raising the dividend and buying back more shares. It has $100 billion in debt, but it has $70 billion in cash and another $173 billion in long term investments. The company has a fortress of a balance sheet, it’s trading for less than the S&P 500, the PEG is 1.35, demand for the iPhone is not slowing down, and services revenue is growing very fast.
I think the company, while not a bargain, is still far from over-priced. I think at this point Mr. Market is offering a wonderful business at an okay price.
I have no plans to sell this company, as I think it’ll continue to earn profits, buy back shares, be worth more over time, and continue to be a wonderful business, so why sell?
I probably won’t buy more at the moment given my 23% allocation, but I have no fundamental problems with one company going up to half of my allocation if it’s a smart decision, so I will buy more if the price drops to a really attractive level.