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The S&P 499

Thomson Reuters reported that excluding Apple, the entire S&P 500 grew profits at a rate of 4.4%. Including Apple the figure is 6.4%.

Using one weird trick[1] I calculated the value of profits generated by the S&P 499 (i.e.the largest public companies excluding Apple) in Q4 2013 and Q4 2014.

Apple therefore accounted for nearly 8% of the S&P 500 in the last quarter. A year earlier Apple was a mere 6%.

Screen Shot 2015-02-08 at 8.43.53 PM

 

It should therefore be obvious why Apple’s P/E ratio is 16.1 while the S&P 499 P/E ratio is 19.8.

Notes:
  1. Algebra []
  • NostraThomas

    Well, since I’m somewhat anonymous here I ask my stupid question: Why is Apple trading at a discount to the S&P 499?

    • http://www.asymco.com Horace Dediu

      Because more people think that the S&P 499 have more growth prospects than Apple.

      • Charlie

        No, I think it’s because Apple is one product (although super successful) company. Makes Apple’s future profitability and growth riskier. I’m not saying it’s good or bad, but that’s what it is.

      • Mark Jones

        But what if that one product (iPhone, or better yet, Apple Watch) is the key integrated pathway to all aspects of your life? See Ben Thompson’s intriguing latest – http://stratechery.com/2015/apples-new-market/

      • Lee penick

        Great link. Thanks Mark.

      • http://sumocat.blogspot.com Sumocat

        Reminds me of that joke in Marvel’s The Avengers: take away the iPhone and what’s Apple? World’s most profitable PC and tablet maker.

      • Charlie

        Yes, but way way smaller in not so growing market…

      • Eric Gen

        I can’t find the numbers, I think that they were in one of Horace’s charts from a week or two ago, but that “way way smaller” was less than 2 billion smaller than Microsoft.

      • http://sumocat.blogspot.com Sumocat

        That’s another flaw in their thinking; a market doesn’t need to be growing for one player in it to grow. I’m very interested in seeing how the Halo Effect plays out in the IBM deal.

      • Space Gorilla

        The iPad alone is the world’s largest PC maker, just FYI. The important thing to understand is that Apple makes computers. The iPhone happens to be a great combination of size and portability, so it’s a very popular computer. But even without it Apple would be doing very well. So yeah, if the iPhone didn’t exist Apple would be a smaller company. But in what world does Apple make an iPad-sized computer and yet miss the opportunity of a pocket-sized computer?

        I guess you’re saying if Apple wasn’t as large and successful as it is right now, then Apple… wouldn’t be as large and… successful? as it is right now? Did you have a point to make?

      • Charlie

        Space Gorilla (nice name btw), I wanted to say that market looks for growth. Even if you consider iPad as PC, what growth do you expect there? And again, I do not agree with such a obsession with growth, but that’s just how it is, I’m afraid.

      • Space Gorilla

        We’re in agreement about the ridiculous obsession with growth. The iPad was growing something like twice as fast as the iPhone out of the gate, it had to slow down. I did the math once, projecting an already slowed rate of growth for the iPad, and it ended up at more than a billion iPads sold per year by 2018, or 2017, I can’t remember, it was a while ago. So it was obvious sales had to slow down dramatically.

        I do expect more growth in the iPad. We’re in more of a plateau right now. Sales are only down four percent for 2014. The media has done a lot of silly reporting on iPad sales. The reality is the iPad is humming along at around 70 million units per year, and at the same time experiencing pressure from the Mac as well as the very capable pocket PC called iPhone, and a long replacement cycle. I have an iPad 2, purchased in 2011, there’s just no reason for me to upgrade it, it works great. The iPad has replaced my MacBook for business use when I travel, for meetings, lots of stuff. By 2016 I’ll be looking to upgrade I think, and a larger screen iPad will certainly motivate me to buy a new iPad. I expect new capabilities and software will be part of that as well.

        The iPad is a PC, people who deny that have their heads stuck in the sand. And at 70 million per year, heck even 60 to 70 million per year, the iPad by itself is the world’s largest PC maker.

      • Walt French

        Apple is pressing hard with new Jobs To Be Done in the workplace, where PCs are most entrenched. A Surface-type device that syncs to the desktop/network would seem to have a better shot at meetings, as a glorified PDA, but Cook, with the IBM collaboration, has made some astute bets. See the Virgin Air announcement this week. It was framed as Apple Pay, but the description of other features matched the advanced services in the IBM app for in-air customer support.

        Then, there’s simple market share. Google is doing quite well, growing, mostly by brokering an ever-increasing share of online ads. I have my doubts about the eventual monetization of ads, and Ben Thompson has his about how well web ads, especially search ads, fill our urge for consumption guidance, but the company can grow quite nicely simply by growing share in its existing markets.

        There’s the “iPad Pro” rumor, something that could allow more office workers than Tim Cook to spend most of their time on an iPad. Especially for people who move around a lot, dropping it into a slot on a bluetooth keyboard, then lifting it to go, is dead simple…more so than my laptop.

        Finally, there are the network effects of all this. Apple managed to steal a step on Microsoft by going for synch etc but has a lot of proving how it works, still left to do. That makes it easier for worker bees to prefer an iPhone to an Android, and a Mac to a Dell. And an iPad somewhere in the mix.

      • Sacto_Joe

        Two years back, AAPL got submarined because, in effect, investors were convinced Apple was through growing. It was, and remains, a silly idea. We saw P/E compression again in January thanks to this false meme, and we are likely to see more compression going forward as well. When you see major growth, and magnify it by flipping unused revenue into shrinking the stock pie in unprecedented amounts, then share price will have to scramble just to keep up, and will more likely fall farther and farther behind – which increases the bang per buck of every dollar Apple spends to reduce the stock pie. It’s a virtuous cycle for Apple that, with continued major growth, can have only one inevitable result; swelling growth in the value of AAPL over time. And I see no impact whatsoever of the “postulate of large numbers” on this mechanism.

        What will people do when AAPL hits a trillion dollar market cap and Apple’s growth doesn’t even slow down? Will they sell the stock back to Apple? Please don’t throw me in the briar patch!

        Apple will almost certainly grow 35% this year. Net income will approach $54 billion. Shares will likely drop to 5.7 billion or less. $10/share in earnings is in sight, probably by this time next year. If Mr. Market doesn’t watch out, that crazy runaway train of massive P/E compression is going to drive even more massive numbers of shares into Apple’s share incinerator….

      • http://www.isophist.com/ Emilio Orione

        Fact is that Apple is a computer company with great ability to make computers and ecosystems.
        They go from tower computers, like Mac Pro, to desktop, like iMac, to laptop, like Macbook, to handheld, like iPad, to pocket size, like iPhone, to wrist wearable, like Apple Watch.
        Happening to build the best pocket size computer that is currently the best size for our computing necessities in everyday life is not a risk in any possibile way, it is a strong point really.
        But the future of pocket size computing is not a problem for Apple since the future of computing and our necessities of computing have surely a longer life and Apple is in the best position to continuing to deliver the best computer devices for the new type of device.
        It has the economic resources, the know how, the franchise, the design taste, the colture to do that.
        They will not enter the new market first but they will be the ones to beat once entered.
        They could be disrupted not by a new device type but by a different way of computing, a disruption of the whole electronic computer hardware and software paradigm, or bad management or a meteorite but not by a slow down of the phone market.
        When phones will stop to sell other use case for computing will emerge: glasses and other wearable, cars, home accessories, pens, name your favorite.

      • Walt French

        Charlie, Apple actually has three platforms by my count: iPod (now, obsolete), Mac (selling many times the product it did when Special Consultant Jobs told Apple to suck it up, they’d lost the PC wars), and iOS.

        iPhone is the dominant product on the iOS platform today, but the platform is ever so much bigger than iPhone. What with Apple Watch, HomeKit, CarPlay, apps, Photos and other services, Apple is both engaging OTHER firms to put their wares on its platform AND snagging a fair share of the profits.

        Look at the fact that banks are advertising their availability on Apple Pay, for example. They would NOT do it if the issue were the iPhone as a product; they are doing it because they hope to profit from iOS (and the related ID/Watch features) as a platform.

        I have seen only a bit of educated thought about the differences between products and platforms (about Twitter’s missteps, IIRC), but the issue screams for attention from somebody who has more experience & insight such as the sardonic Mr. Dediu.

      • Charlie

        Walt, I tried to explain the reason why market prices Apple as it is. It’s not that I agree with it fully. But the fact is, although there is a lot of promising ideas, products etc, iPhone is so huge that any new source of revenues has to be in multi-ten billion dollars size and still growing to have financial impact as another business leg.

      • Jeff g

        Charlie, I think you are right about the perception. Although, I don’t think it has to be a new business leg. It can be growth in an existing leg like iPhone just showed, or renewed growth in the iPad, for example, if say a larger version with multitasking screen comes available, and that coincides with an upgrade cycle, and IBM partnership pitching to Enterprises.

        Anyway, I agree with you that that is the perception. But I don’t agree that the perception is accurate.

      • Walt French

        This post aptly compares Apple to the aggregate of the other 499 companies in the S&P 500.

        Collectively, “499 Inc.” is 20 times Apple’s market value.* People have no trouble assigning a higher P/E to 499, despite its huge market cap—20 times Apple’s!—slower historical earnings growth and a slew of inferior metrics.

        499 also has generated fewer new products, invests a smaller share of its market value in R&D, and has a terrible —really, horrible track record— on innovations — take the very large financial sector for example: one very expert wag claimed they’ve done nothing economically valuable since the ATM.

        Apple Watch, at 20mm/year (Horace’s estimate, IIRC) is a $10billion business. Apple Pay: directly maybe 1 billion. HomeKit and CarPlay: ditto. AppleTV keeps growing slowly, and we’re seeing the cracks form in cable’s hold on households.

        But like iTunes, they are just the ones we know of today. Apple should be valued as an innovation company, one, with various products sticking like the tops of a giant iceberg, out of the water. While I have no special insight into how well Apple Innovation Inc will do in birthing new products, extensions of its platforms, it seems extremely short-sighted to pretend that the existing products are what the company is. Apple Innovation produced the Mac, the iPod, the iPhone, the iPad, etc. They will produce more innovations and the only question is how successful those will be compared to their past monster successes.

        * Apologies: with retirement comes loss of access to all the wonderful data services, such as S&P’s daily updates, that would allow me to be more precise.

      • pendolino

        To second Horace (in my utterly humble opinion) I think that people (including myself) think that AAPL may have most of their growth behind rather than ahead of them.

        I’d also like to add that I am an AAPL bull with a decent position in AAPL partially because I think I will be proven wrong and partially because I think it is a good portfolio diversifier.

      • NostraThomas

        Well, as long as Apple is included in the S&P, then the S&P DOES have good growth prospects.

      • Brrriiiaaallliiiaaannnttt

        It also helps to think of it in terms of risk/reward. How likely is an investor going to double their investment? For AAPL, it would have to get to $1.4T. This is possible, but very unprecedented. The S&P 499 will most likely double based on historic trend lines, it’s more a matter of how long.

      • Mark Howard

        If there is a psychological glass ceiling on market cap, let’s say $2T for fun, then Apple can simply buy themselves private over time. Imagine one final share of APPL outstanding trading at $2T. 🙂

      • Brrriiiaaallliiiaaannnttt

        This is a great point, with Apple’s free cash flow, and $160B+ in the bank, they could really push the take-private needle

        There was a time back in summer 2012, when all Apple had to do was not grow at all 0%, put all earnings into stock buyback, and be private before the turn of the decade 2020 – AAPL was trading at a P/E x cash of sub-7. Man, if you grokked Apple back then, it was truly the investment of a generation

      • BMc

        Not sure why this topic keeps circling. Apple is a company with owners (of shares), and it is listed on a public stock exchange for . A company going private is when some entity buys all of the shares outstanding and delists from the public stock exchange. That entity which has purchased those shares has owners – they own the newly private company.

        A corporation cannot own itself. Someone has to own it.

      • Brrriiiaaallliiiaaannnttt

        I was being somewhat theoretical to show how cheap and obvious of an investment AAPL was in the summer of 2012.

        However, yes a company can, for all intents and purposes, take itself private – The Tribune (Chicago Tribune, LA Times, WGN, etc) were public then bought back most of its shares and went private.

        Maybe this isn’t technically right, but the math behind AAPL at a p/e x cash of 7, with 0% growth, putting all cash and earnings into buybacks (AAPL share price staying the same – ceteris paribus), would, in fact,have allowed for all shares to be retired by 2020. It isn’t debatable, but a fact. Cheers, Craig

      • BMc

        Hi Craig,

        I do agree with your view that Apple is undervalued compared with other companies when looking at its cash-on-hand, customer base, customer satisfaction, 5 year average growth rate etc. The buyback indeed was a very good use of excessive cash to reduce shares & make each remaining share that much more valuable.

        I still don’t see how Apple (or any company) can take itself private though – even in the scenario above. When Apple is buying back its shares, it is retiring those shares – they are no longer in circulation. “Apple” the company (or management) is not retaining these shares & owning a piece of itself. There are less shares, and for those that didn’t sell their shares back to Apple, they now own a corresponding larger (% wise) piece of the pie. That is why shares on the market after a buyback can rise in value – each share is worth “more” (EPS rises).

        So Apple isn’t continuing to buy shares to own itself, it is just reducing the “owners”.

      • Brrriiiaaallliiiaaannnttt

        @BMc Agreed, you are correct, and your comment helps me better conceptualize what buybacks actually are (e.g. always knew EPS was directly impacted by a buyback, but your explanation helps me think through the actual cause –> effect), will save this thread, Cheers, Craig

      • Walt French

        Just to reinforce your point: they would be reducing the number of owners; who would each own an increasingly large share of the company—presumably leading to the stock price to increase (inversely) proportionally to thar number of shares out. (Otherwise the P/E would plummet, perhaps the least likely outcome if it became obvious that some insiders were trying to corner the market in Apple.)

        The buybacks are a psychologically interesting to paying out the cash as dividends, combines with a partial reversal of the 7:1 split that they did a bit back. It’s as meandering, as uncertain a “strategy” as I’ve seen from Cupertino.

      • http://www.asymco.com Horace Dediu

        If the price per share does not change then the last single share left un-retired would be the current price (~$220). Since that one share is used to value the entire company then the entire business would be priced at $220. In theory this might be possible, but if you owned that share (and hence the entire company and all its cash), would you sell it for $220?

      • Brrriiiaaallliiiaaannnttt

        Nope, but I would gladly sell it for $700B +/-, based on todays P/E x cash of 12 +/-.

        This illustrates the potential stock price increase created by a strong buyback approach of a company with low valuations and solid growth. (E.g. APPL in the summer of 2013)

        Note: If I do sell my one share for $700B, I promise to take the entire audience of ‘Critical Path’, and ‘Asymcar’ on a round the world extravaganza of disruption and finding the jobs to be done! <;)

      • Walt French

        Despite some recent opportunistic meddling by some throw-your-weight-around types, Apple mostly does pretty well with capital markets. You could even make the case that the “dialogue” about what Apple should do with its cash helped raise the P/E, without really distracting Management from what it ought to be doing. The Board apparently gives them good advice, and Wall Street lets them borrow money on extremely favorable terms.

      • rational2

        I hope I’m the lucky owner of that one share 🙂

      • Jeff G

        I think there is room for some calculus, or geometry or something in this discussion too, especially on the site named Asymco… Perhaps something asymptotically approaching something?

        Like apples number of outstanding shares, asymptotically approaching zero…

        Seriously though, Mark brings up a good point, in my opinion. If Apple continues their financial success, the inevitable result is a long-term shrinking of the share count. Let’s say this continues into the 2020s for example. I could foresee a time where Apple will trade at a premium to the traditional indices, not only for their product, service, and financial superiority… But also for the perceived and growing scarcity of public ownership possibilities.

      • rational2

        Really, the stodgy companies that make up most of them S&P 499 have better growth and cash flow prospects than Apple? Except for a few companies, most on this list are burdened with huge debts and need constant credit to eke out growth beyond inflation. Many of these companies have large market shares in one or more categories and can’t grow much.

        Think about cash flow and how Apples profits can be returned to shareholders through dividends and buy backs.

      • Jeff G

        Why would anyone ever expect Apple to do something unprecedented?

      • Lee Penick

        That’s because there is nothing else left to invent with regards to computers, software, and their service to mankind. Once everyone owns an iPhone 6, it’s game over.

    • Mark Jones

      Um, because it’s doomed. I’ve heard Apple’s hugely profitable run most certainly ends soon, really soon, because the as-yet-unreleased Watch is a dud (hey, no one wears watches anymore!), the iPad is dying, the iPod is dead, the iPhone only sells well to previous iPhone owners, the next iPhone won’t have anything new that affluent people want (hey, larger displays was their last great innovation – copied from Samsung), they don’t know how to make a competitive AppleTV, iTunes is passé and Beats Music has few subscribers, the Mac is in a declining industry, Steve Jobs is dead, and haunted Tim Cook is no Steve Jobs. One more thing, like Enron, today’s Apple only cares about the money not its users (i.e., selling bonds, returning cash, everything for lock-in not quality). Surely, it’s doomed.

      • Jeff g

        Omg . Thx. I’m sitting out front in my car reading this and laughing out loud!

      • http://www.noisetech-software.com/Home.html Steven Noyes

        That is the best recap of every doom and gloom Apple scenario I have read.

    • r00fus

      Because Wall St. doesn’t control it.

  • http://sumocat.blogspot.com Sumocat

    Algebra. It’s what separates critical thinkers from journalists.
    http://daringfireball.net/linked/2014/12/30/algebra

    • Lee Penick

      Algebra…some journalists don’t know which helicopter they are flying in! 🙂

    • r00fus

      Someone needs to make a Samuel L Jackson gif with
      “Algebra, mofo – do you grok it”?

  • globalmacrospeculator

    size. the largest company in the world almost always trades at a discount to the market, because there has historically been a limit to how much more it could grow, given that it is already the world’s largest

    • rational2

      Except, in this case, the company is large only in market cap (and revenues, profits). It’s much smaller than many companies in employees, products, product categories, and market share. In other words, it is only burdened on its balance sheet, a problem of accounting and reporting that’s easily handled by a few people and computers. Apple is not burdened on all the other fronts that might make it harder to grow. Lots of room to grow. That’s the point missed by the group thinking ANALyst.

  • Ian Ollmann

    Maybe this point would be driven home by a plot of EPS over time vs. the expected future profits per share as given by the stock price at each quarter. If you still have the data, you can overlay analyst earning projections at each quarter.

  • iObserver

    Hi Horace, excellent analysis as always!
    I have a clarifying question because Apple is unlike every other stock in the SP500: A couple years ago the S&P changed the way it weighs Apple and Apple alone: at 1/2 of its market cap. Every other company in history and currently have been 100%. Many posts I’ve seen about Apple’s contribution to the S&P this earnings season don’t address this. When I have reverse engineered their calculations generally people don’t take this into account. So Apple actually earned double the reported earnings growth visa vis its weighting in the SP500.

    Example hypothetical calculations: SPY earnings raise 10bn, 2bn without AAPL.
    Therefore the 8bn AAPL is responsible for in the SPY earnings growth in this example would actually imply that AAPL’s own earnings had risen 16bn.

    Thanks! This is a particularly confusing topic to report on due to Wall Street’s odd exception with the way it weighs Apple.

    • Walt French

      The S&P 500 committee has had a very strict policy of using the number of float shares — those not held by insiders — to determine the weight. S&P recently joined up with the Dow indexing group, which has screwball weights (last I looked, IBM was the biggest contributor), but the Dow doesn’t have Apple. The index portfolio, built up from all its companies’ total traded shares, is an excellent measure of the performance of a dollar invested by non-insiders in those large companies because it includes all dollars in those companies. An index fund, such as I formerly ran, might buy 0.1% of all the float shares, and be perfectly replicating the index performance easily,without wasteful turnover, generating buys and sells only for additional cash, or cash outflows by the fund’s shareholders.

      Perhaps you’re thinking of the NASDAQ index, which, because it is market-specific — only a small fraction of the 500’s market capitalization — would have Apple above 25% of the index if it was included at the normal weight scheme of float capitalization. 25% is a magic number in that replicating mutual funds become “non-diversified” in SEC-speak, and e.g. govt employees need to declare their holdings of non-diversified funds on their conflict of interest statements.

      Other relevant indexes (chiefly the Russell 1000 that institutional investors are fond of, and to a much lesser extent, the MSCI indexes that offer good international comparisons) likewise pull no such shenanigans.

      • iObserver

        I can’t find the link, but a couple years ago, months before Apple’s big decline in stock price, the S&P 500 which generally weights stocks based on their market cap (market cap company A / divided by / all market caps of SP500 added together) made an exception. It decreased Apple’s contribution to the index to just half its market cap.

      • Walt French

        In that time frame I was running a couple of index funds, including a large 500 fund and several individual entities’ “socially screened” funds that omitted various sin stocks or nuclear decommissioning trusts that were disallowed from holding other nuclear power entities.

        I am utterly certain that the info you saw was bad. There are many misperceptions about various indexes, and too many people who don’t know either the theoretical justifications for index funds nor the practical impacts of the decisions around them. Plus,, those who don’t know algebra.

        I had the privilege of being a data vendor rep for the first 500 index fund in SF (before Bogle got bitten by the bug) and followed the industry extremely closely. The only justification for the type of move you saw claimed would be to run counter to the justification that supports index funds, perhaps to stand out from the pack.

      • MarkS2002

        I can’t find a reference to the S&P; but a Barron’s piece from 2012 discussed this in terms of the Dow, when the price of a share was high and any volatility in a stock so priced would act like the tail wagging the dog, as far as upsetting the average. It was suggested that minus a major stock split, up to 10 to 1, Apple should be weighted at half of its total value. I also remember that discussion at the time. The piece i read did not mention this being carried out in the S&P listing. Duly noted that that problem has been solved by last years split.

      • Walt French

        Bear in mind that the Dow, which is essentially one share per each of its 30 members, would be impacted by a split, but the S&P500, which is essentially ALL (float) shares for each of the 500 company, is utterly UNAFFECTED.

        Just as a portfolio manager running an index fund is unaffected. If the correct weight is say, 5% before the split, the 7:1 split means you will receive exactly the right number of shares in the split that you need to hold. Every 1% change in Apple’s per-share price (in its market value) will STILL be a 0.05% change in the broad index. Likewise, Apple’s market value is not affected by the split directly, although some investors may see it as more accessible at the now-lower per-share price, and bid the price up a bit.

        The split had essentially ZERO impact on Apple’s S&P weight. I recall the issue being raised as to whether Apple should be part of the Dow, a very separate issue due to the Dow’s unrepresentative methodology.

  • pk_de_cville

    Horace,

    I hope your fun with averages get replicated elsewhere. You compared Apple to the 500 w/o Apple. I find the ‘standard’ method of assessing Apple or its products is to compare its numbers to the average of the others //while including Apple// within the average.

    Just making some stuff up here to demonstrate:

    Apple’s quality score is 92.

    The average quality score with Apple is 84.

    The average quality score without Apple is 72.

    The truth is Apple’s quality is dominant at the real comparison: 92 vs 72.

    (This type of honest comparison is never made except here, in your post.)

  • beidaren

    This reminds me of the PC sales numbers published by IDC and Gartner. They always include Mac in PC total and say: PC grow X%, and Mac grow y%. Since Mac nearly always outperformed PC, this makes windows PC looked much better.

  • GlennC777

    A lower PE is *good* thing for investors. It means you get a larger portion of earnings from your investment. One way another, those returns will be delivered to you over the long term, mostly by capital appreciation (even if PE remains static), unless the company fails to re-invest its earnings well; and that is no less likely with a high PE.

    The usual downside to a low PE is the implication that a company’s prospects aren’t as good. If they are, as I think they are in Apple’s case, then the stock market has given you a gift.

    Sure, it would be nice if the PE would go up after you buy, but only if you expect to take advantage of it by selling. If you expect to continue to buy, then the low PE is a double benefit.

    • Sacto_Joe

      It’s always about whose ox gets gored. A low P/E is not a good thing if you’re on fixed income, your buying days are behind you, and you need to supplement your income with share sales.

      You must be young, well off, or both or that thought would have occurred to you. If you also own Apple, you just hit the trifecta!

      • GlennC777

        I hear you, but just for the sake of argument, if you imagine that PEs were fixed, you would be much better off investing in a PE=10 market than in a PE=50 market. Of course, it’s nice to have them go up after you’re done buying.

      • It’s The Math, Stupid!

        “Of course, it’s nice to have them go up after you’re done buying.”

        ONLY if you’re a short-term speculator. For long-term partial owners in a business perennially buying back its shares, a persistently low valuation is awesome. It’s amazing how hard it is for the general “investing” public to grasp this matematically-irrefutable truth.

      • GlennC777

        In a case like that it would really depend on the specifics, there would be no general rule.

      • Mel Gross

        Again, I’m seeing some people make that statement without explaining why it’s so. I’ve been investing since I was a kid, and that’s for 52 years. I’ve been pretty successful. Much of that success was because stocks rose and increased their p/e. Now, talking about an unusually high p/e, such as 50, isn’t a stable place to be. But if, over time, a stock rose to the average, then that perfectly good. If the company then has another good quarter, the p/e will drop some, allowing it to begin again.

        But there’s no good reason for Apple’s p/e to lag the market, Despite the buybacks. Indeed, the purpose of the buybacks is to increase the stock price, including the p/e, because the p/e is too low.

      • Good For Any True Investor

        You are, mathematically, wrong…unless you had plans of unloading all of your shares after a quick run-up. And then you’re a speculator, not an investor, and you’ll get what you deserve.

        For even if you plan a long, gradual liquidation of your shares, let’s say 5% a year for the next 20 years, then you’ll be FAR better off if the valuation stays low (assuming Apple continues to buy back a meaningful dollar amount of shares annually).

      • Sacto_Joe

        Can we make that assumption? I don’t think so. But it’s a valid point that a lower valuation gives Apple more bang per buyback buck. The massive buybacks have certainly changed the equation.

      • Mel Gross

        You would have to explain why that is so, and I don’t believe that you can.

        Whether you are holding on to the stock, selling it off quickly, or selling off slowly over time, the higher the price at the time of the sale, the more profit you will make.

        Having the price of the stock suppressed, will just give you less return on your investment than otherwise.

    • Love Those Low Valuations

      True That!

      Finally! Someone (other than Buffett) who understands that if you’re going to be a long-term, partial owner of the business, and said business is surely going to be committing substantial portions of their excess cash flow to buybacks, then the best thing that could happen is that AAPL always sells at a substantial discount to its true value. Assuming the P/E ratio stays roughly equivalent today, roughly, then having Apple buy back those billions and billions of shares over the years ON SALE is great news, and is the surest way to increase the “E” part of the “P/E”…even if absolute earnings are fairly stagnant.

      Indeed, now that Apple finally seems serious about share buybacks (and hopefully, the tax code will eventually aid this), the prospect that they’ll likely have a perenially too-low valuation is one of the more compelling reasons for me to want to own it. Just takes a not-with-the-crowd mindset.

      • Mel Gross

        That doesn’t really make sense. If a stock is undervalued, then doing a major buyback is supposed to raise it. If the buyback is efficient, the ther raise in value of the stock will exceed the value taken out from the buyback. Therefor, the p/e should go up because the stocks should rise by more that what was removed from the total stock count.

        If it rises just enough to keep the same p/e, then there was no gain in value overall.

      • Walt French

        Mel, two points in this contention.

        First, the P/E that we want is irrelevant. What matters is only the P at which we buy and sell, and the dividends that are paid out in between. Of course those all have to do with perceptions for, and actual results in revenues… and earnings. But we do not command the market to adopt our sensible P/Es; we only get to guess at the Ps.

        Second, the buybacks. Imagine an X% buyback. The average holder will—must—tender (sell) X% of her shares. (Indexers will unload exactly X%; others will sell more or less but by elementary arithmetic, sell X% on average.

        Each shareholder (or the average shareholder if people don’t march in lockstep) will therefore receive an X% dividend. There will also be a de facto reverse X% stock split, so X% fewer shares are outstanding but each shareholder (or again, the average shareholder) owns the exact same fraction of the company—slightly fewer shares, but of a slightly reduced total.

        The net effect is actually the same as if Apple had simply paid an X% dividend; the cash leaves its balance sheet and goes to shareholders’. (And the counting of shares changes.)

        If this affects the share price any way other than the way a simple-minded accountant thinks it would, it is a sign of changed thinking about the stock. The magic effects that some claim would happen if foolishness and unicorns prevail; there’s the chance that higher valuations result from belated awareness of…well, of the most widely-reported statistic in the last 5years of US markets, the incredible amount of cash that Apple amasses. It’s really hard to make the case for belated recognition, meaning there’s some chance any run up is a transient foolishness by investors waiting to get picked off for buying at a price that won’t rise as rapidly given a bubble of optimism.

        I don’t refuse to accept psychological effects from the CFO’s activities; I merely say that investors expecting this effects to have a lasting importance are asking to be parted from their money.

      • Mel Gross

        I actually agree. I was pointing out that there is no sense that markets are in any way rational, and they aren’t, or we couldn’t make money from them. Yet, a lot of what were told, assumes that they are rational.

        I use p/e because it’s an interesting indicator that everyone pays attention to. It’s more of an indication than the DOW, for example, which is entire,y useless, but still around.

        I appreciate the lesson, but it’s unneeded.