Apple CEO Tim Cook delivers the keynote address during the Apple Worldwide Developer Conference.
As a value investor, I am as focused as anyone on the various valuation metrics of the stocks that I own and recommend. However, I would never want to be boxed into an arbitrary definition of Value based simply on a financial metric like price to book value or even a P/E ratio.
After all, many might not categorize stocks like Johnson & Johnson
JNJ
DIS
FB
In my view, there is much more to choosing an attractively priced stock with handsome appreciation potential than a few valuation metrics. Indeed, I have long argued that growth is a component of the assessment of the investment merits of any company. In fact, the three-to-five year target prices highlighted in The Prudent Speculator always consider forward-looking expectations for sales and earnings, not to mention brand strength, competitive position, product breadth and depth, and management prowess.
No doubt, there is a whole lot of art that goes into the science of Value investing, but I wouldn’t have it any other way, especially as three of my largest holdings are major constituents of the Russell 1000 Growth Index.
Together, Alphabet (GOOG), Apple
AAPL
MSFT
An uncertain macro environment has pushed down the shares of most public advertising businesses in 2022. While a lull in ad spending shouldn’t come as a surprise, I expect Alphabet’s search business to continue to generate tremendous cash flow. Profitability ought to also improve for the business as a whole as it curtails spending, reduces the number of new hires and Cloud approaches profitability.
GOOG is reasonably priced at 19 times forward earnings estimates, especially given the nearly $100 billion of net cash on the balance sheet and expectations that EPS will reach more than $8.00 by 2025.
In the case of Apple, owners benefit from one of the most financially skilled CEOs in the game in Tim Cook, who has guided the firm’s expansion into new products and services.
AAPL shares are down more than 6% on the year as the company has not been immune to challenges from supply chain disruptions driven by both COVID and silicon shortages. True, the P/E ratio is not as inexpensive as it has been in the past, but the company generated nearly $23 billion in operating cash flow, returned over $28 billion to shareholders and continued to invest in its long-term growth plans during the just-completed fiscal third quarter.
Patient owners should benefit in the years ahead as the iPhone line continues to surprise, as it sits at the center of the Apple ecosystem and has seemingly become more of a need than a want in the eyes of global consumers.
Like the previous two, shares of Microsoft have also been under pressure this year and MSFT is off more than 15% since the end of 2021, affording a favorable entry point for those without a position.
The rotation to a subscription model has had a tremendously positive impact, turning the 365-product suite into a cash flow machine with high visibility, while growth in Azure is very impressive considering its size, scale and caliber of customers. Finally, these businesses are complemented by growth in the Xbox gaming platform and business-social network LinkedIn.
And in an arguably tough quarter for tech spending. Microsoft in fiscal Q4 grew its top line by 12% year-over-year, with Cloud revenue jumping 28% to over $25 billion. More importantly, the company’s forward guidance surprised to the upside, with management suggesting that both revenue and operating income in fiscal 2023 will grow by a double-digit percentage. With the expectation of further growth in the years ahead, analysts think EPS will hit more than $14.00 in fiscal 2025, which would put the P/E multiple then at a very reasonable 20 times.
So, for those wondering if GOOG, AAPL and MSFT are Value or Growth investments, I would answer yes! Nothing wrong with that – who wouldn’t want attractively valued stocks with very good long-term growth potential?
Disclosure: Please note that shares of the stocks mentioned are owned by asset management clients of Kovitz Investment Group Partners, LLC, a SEC registered investment adviser. For a list of stock recommendations like this one made in The Prudent Speculator, visit theprudentspeculator.com.
