Apple: With Enemies Like These, Who Needs Friends?


Shortly after Donald Trump won the presidency, I extrapolated sentiment from his campaign to the investment world. How would his policies and regulations impact my holdings? One of the most pervasive themes reiterated in speeches was protectionism. He harped on the importance of retaining American jobs as manufacturing and other industrial production shifted overseas over the previous decades.

Immediately, a domestic shipping company I own came to mind, Matson (NYSE:MATX). I predicted Matson would be poised to benefit from his prospective policies as it operates under the Jones Act legislation, which effectively protects the cabotage business from foreign operators. I considered adding to my stake. Let’s see how that shaped out:


Chart from Charles Schwab

Not exactly smooth sailing. Matson dropped like an anchor between Trump’s election and last summer before rebounding somewhat this past year.


At the same time, I was getting spooked about my Apple (NASDAQ:AAPL) holdings. Apple is one my largest positions and newly-elected President Trump did not seem to be a fan (to put it kindly). Let me count the reasons for my apprehension:

In 2016, Trump went so far as to say, “boycott Apple” in the aftermath of a legal battle between the FBI and the company.

President Trump’s platform of bringing manufacturing jobs back to America targeted Apple specifically. He said:

But wait, there’s more. Trump’s immigration policies conflicted so much with CEO Tim Cook that Cook issued a public rebuke saying: “This is unacceptable. This is not who we are as a country. I am personally shocked that there’s even a discussion on this.” As if to add insult to injury, Cook once again returned to the spotlight to protect his company’s lucrative relationship with China after the President proposed imposing tariffs, which many feared (and continue to fear) could escalate into a full-fledged trade war.

No one ever mistook me for a rocket scientist, but it doesn’t take one to discern that Apple had many foreseeable headwinds than Matson and I had many reasons as evidence.

But since I ascribe to the conventional wisdom of buy and hold investing (very rarely selling), I held onto my Apple stake that was purchased in the $90/share region purchased in 2016. Let’s take a look at how that panned out (especially compared with my optimism for Matson) post-election:


Chart from Charles Schwab

Quite a difference. In essence, the company I was most concerned with performed the best and the company I was perhaps most optimistic about performed the worst. How can this be?

Obviously, politics is just a component that can influence a company’s prospects and not the singular factor. But I am going to drill down into how Apple succeeded despite the salient acrimony between the current President and the current CEO.

How Did Apple Overcome Politics?

It is no secret that Apple’s cash stockpile grew enormously over the past 5 years. But shareholders did not benefit as much as they could have as 90% of the cash sat overseas (unreturned to shareholders). Apple was unwilling to repatriate and incur an unfavorable tax rate on the money, so management decided to wait in hopes of a tax holiday or reduction in the corporate rate. But the economy was humming along and there was no impetus for politicians to work on a fiscal stimulus as there was during the Great Recession.


And yet...

Congress and President Trump delivered a gift on a silver platter as Congress passed the Tax Cuts and Jobs Act of 2017. After this law passed I remember turning a proverb on its head thinking, “If Apple has enemies like this, who needs friends?” With an unparalleled cash reserve, Apple would become the envy of the corporate world (as if it wasn’t already) and the chief beneficiary of Trump’s hallmark legislation.

Overcome politics? It’s as if they wrote the legislation themselves. But that’s not the only story here.

At the same time that Apple was busy finding places to temporarily park its overseas cash, the technology giant was assuming debt. A lot of it. The latest figure points to close to $136B of corporate bonds. Like most investors, I keep a watchful eye on high debt levels as leverage can doom even the most premier companies so it was mildly alarming to see Apple’s debt figures expand.


But Apple was incredibly savvy, you may even say historically so. Interest rates were so low (never lower) and Apple’s credit rating was so high that the cost of issuing the debt was far beneath the return on equity (nearly 40%).


Chart from CNBC

Apple’s net margin is approximately 22%, so it is no surprise then that they are just plowing the money (stored overseas) right back into share buybacks and dividends. It’s almost hard to believe, but the buyback chart below is going to move further to the upside as part of Apple’s massive $310B buyback program:


YCharts

Takeaways And Where We Go From Here

We know that Apple shares have paradoxically performed extremely well under President Trump, but are they positioned to move up further? I believe they are and I think that despite Apple’s astronomic market cap of nearly $1 Trillion, it remains one of the cheapest stocks in the market.

The P/E of 17 is likely to compress as buybacks reduce the share count. With just 1/3 of the $300B buyback put to use, Apple can retire half a billion shares. That will boost the EPS number to about $14.50, which would produce a P/E of less than 14, even at $200/share. In my estimation, Apple encountered precisely the opposite problem that I had anticipated when President Trump was elected:


Custom Image

But don’t just take my word for it. The greatest investor of our generation, Warren Buffett, has been building a massive stake for his company (Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B)) to take advantage of the windfall. Berkshire now owns about 240M shares. I am not going to sit back and slap a price target on this stock because I think it goes over $200 and not by a little, but by a lot. I don’t know when that will occur, but I know that if the share price were to drop, two big buyers would step in (Apple and Berkshire). You don’t bet against that kind of combination of bottomless pockets.


Finally, revisiting the introduction where I had attempted to presciently predict policies and eventual winners/losers, I realize that I really missed the boat (pun intended). Matson, while still a quality business, has not benefited much from Trump’s policies. And despite Trump’s axe to grind against Apple, the company has nearly doubled in value since his election.

Using my expertise analyzing politics did not help as much as the simple investing advice repeated time and again: Buy and hold quality companies. The ones worth investing in will easily maneuver the fickle waves of ephemeral politics.

Disclosure: I am/we are long MATX, AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.