A possible explanation for low P/E

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    Posted: 07 December 2011 05:19 PM

    Like many others I have been mystified by the P/E compression that seems to plague Apple.  I have a theory, but I am really not very sophisticated in all this and would appreciate hearing what people think. 

    To me, a low P/E is equivalent to saying the the price is too low.  While it is true that investors look at the P/E ratio as an indication of whether the stock is over or undervalued, there are not any real rules binding a stock to a specific range.  We see AMAZON at a P/E of 100 and remember Apple at a P/E of 45 without the iPhone or iPad.  In other words, what we are seeing is really a lack of movement in the price. This leads me to reformulate the question as “Why is Apples price so low?”

    This leads me to the fact that 70% of Apple is owned by institutions. Institutions are forced to diversify. Given Apples record, I wonder if it is possible that the institutions are maxed out.  Every move up bumps them against their limit and they are forced to sell shares to re-balance.  Without the little investor to pick up the slack, the stock stays in it’s range, regardless of the potential for growth or profitability.

    As I said, i am pretty naive, but I would love to hear ideas about this perspective

         
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    Posted: 07 December 2011 05:48 PM #1

    This topic is discussed ad nauseam.  You may want to refer to these two most recent post one and post two.

    Please don’t make another post on Apple should do a buy back :evil:, every time Apple pull back significantly, some one would make this post.

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    Posted: 07 December 2011 06:15 PM #2

    Bud77, you have presented a plausible factor I have not seen analyzed yet on this board, although many theories abound here as Mace declared.  I would like someone with actual knowledge of the inner working of institutional investors to chime in.

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  • Posted: 07 December 2011 06:56 PM #3

    I have not kept up on this topic, but it does seem a new twist to me. It would be good if, as macglenn suggests, someone could clarify this idea.

         
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    Posted: 07 December 2011 07:39 PM #4

    hledgard - 07 December 2011 10:56 PM

    I have not kept up on this topic, but it does seem a new twist to me. It would be good if, as macglenn suggests, someone could clarify this idea.

    Is not new.  Surprise you and macglenn thinks is new.  Many AFBers/ bloggers have said it umpteen times.  Boring for me to read the same thing expressed in different way rolleyes.

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    Posted: 07 December 2011 07:51 PM #5

    I am not sure about the umpteen times, but I DID find this in one of the threads you suggested:

    “Institutional and retail investors have fixed sum of money to invest.  Not all is like me put all into one stock, AAPL.  Most limits it to x% of stock portfolio.  For AAPL to rise, need new liquidity which can come from new investors and increased income/fund of existing investors.  As AAPL rises, existing investors would sell to maintain it as x% of its stock portfolio, dampening its rise.  When the market cap is large like now, the effect is more pronounced.  With global deleveraging, new liquidity is hard to come by.  Prior to financial crisis, many folks borrow margin to buy stocks, now most not only don?t have margin but have standby cash.” 

    While the author’s English is somewhat tortured, I think he was close to the same idea, i.e. that a limit on available cash exists. I was thinking of rules that limit the exposure to a single stock, he was thinking about a “fixed amount of money to invest”  The basic idea is the same.  I am not sure who this bright guy was, but I have to say I agree with him smile

         
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    Posted: 07 December 2011 08:06 PM #6

    Bud777,

    Carrot and stick simultaneously LOL.  You’re a politician.

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  • Posted: 07 December 2011 08:15 PM #7

    Bud777 - 07 December 2011 09:19 PM

    Like many others I have been mystified by the P/E compression that seems to plague Apple.  I have a theory, but I am really not very sophisticated in all this and would appreciate hearing what people think. 

    To me, a low P/E is equivalent to saying the the price is too low.  While it is true that investors look at the P/E ratio as an indication of whether the stock is over or undervalued, there are not any real rules binding a stock to a specific range.  We see AMAZON at a P/E of 100 and remember Apple at a P/E of 45 without the iPhone or iPad.  In other words, what we are seeing is really a lack of movement in the price. This leads me to reformulate the question as “Why is Apples price so low?”

    This leads me to the fact that 70% of Apple is owned by institutions. Institutions are forced to diversify. Given Apples record, I wonder if it is possible that the institutions are maxed out. Every move up bumps them against their limit and they are forced to sell shares to re-balance.  Without the little investor to pick up the slack, the stock stays in it’s range, regardless of the potential for growth or profitability.

    As I said, i am pretty naive, but I would love to hear ideas about this perspective

    You are touching upon a thesis I proposed here http://www.macobserver.com/tmo/forums/viewthread/81898/P0/
    just this last week.  It starts with post #9 in the thread.  There are follow up posts clarifying different points as well.

    What happened to the little investor’s investment capital (and institutions for that matter) during 2008?  I think the answer to both our positions lays in that question.

    I like your thinking.

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    Posted: 12 December 2011 12:03 PM #8

    In thinking more about this idea, if it is true then the funds should have to sell Apple when money flows out and buy when it flows in.  Assuming that they want to always be at the max position allowed by their bylaws, there should be a strong correlation between the amount of money they control and Apples price.  Does anyone have the data to investigate this?

         
  • Posted: 12 December 2011 12:25 PM #9

    Bud777 - 12 December 2011 04:03 PM

    there should be a strong correlation between the amount of money they control and Apples price.  Does anyone have the data to investigate this?

    Check out post #18 here

    http://www.macobserver.com/tmo/forums/viewthread/81898/P0/

    Google docs crucified my charts, but the raw data is there if you wish to chart it.  The data shows the correlation between AAPL’s price and money flows.

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  • Posted: 12 December 2011 12:51 PM #10

    if this was all because of their limitations to invest over certain level, how did MSFT get to a 500B valuation at the time when no QE existed by FED’s and that’s not adjusted for inflation either.

         
  • Posted: 12 December 2011 01:09 PM #11

    mstefa - 12 December 2011 04:51 PM

    if this was all because of their limitations to invest over certain level, how did MSFT get to a 500B valuation at the time when no QE existed by FED’s and that’s not adjusted for inflation either.

    It could have very well been because MSFT was a member of the DOW.  That opens up a lot of funds that invest primarily in the DOW.  More funds - more capital, more capital - higher price.

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    Posted: 12 December 2011 03:06 PM #12

    Thank you for confirming that Gregg.  So, I guess this means that when Apple blows out the next quarter, we should expect to see another drop in P/E, not because no one wants the stock, but because the little guy cannot afford it and the big guys already have all they can buy.  It will be interesting to see how this unfolds.  I get the feeling that a 5-1 split would bring in a lot of money in a hurry, but realistically, I think we are in for a long wait before things get back to normal.

         
  • Posted: 12 December 2011 07:34 PM #13

    Bud

    I think youre right, and the glass ceiling we’re bumping will stay largely intact until there is a situational shift.  Such a shift could be:

    Dividend
    Buyback
    Stock split
    Dow entry

    Any or all would probably attract new blood. I won’t bore everyone here with arguments for/against these possibities, but personally I think we’re nearing such an event.

         
  • Posted: 12 December 2011 08:39 PM #14

    There’s always money available somewhere for a great deal.  Most people simply don’t agree with us AFB members that AAPL is underpriced.  What do we see they don’t?  Here is a representative opinion, from today’s musings:

    http://news.cnet.com/8301-27076_3-57341421-248/is-apple-vulnerable-in-2012-you-bet/

    People analogize to what they know.  In Apple’s case they analogize to Sony, Motorola and a lot of other once high-flying consumer device-makers who all suffered fast and furious declines in the face of transformative competition.

    What we understand far more than average investors is that Apple consumers are far, far stickier to Apple than any other device-maker in history, which make the analogies deeply flawed.  The stickiness comes from a combination of ecosystem effect, brand loyalty, and consumer satisfaction.

    Apple’s growth may soften a little in 2012 (or strengthen) but we know that the chance that Apple revenues IMPLODE like so many of its predecessors is remote.  AAPL’s PE suggests that most people believe imminent implosion is likely. 

    Stickiness of customers for consumer device-makers is a new phenomenon.  Those of us who “get it” can benefit from this understanding with investment dollars.

         
  • Posted: 12 December 2011 09:26 PM #15

    macorange - 13 December 2011 12:39 AM

    There’s always money available somewhere for a great deal.  Most people simply don’t agree with us AFB members that AAPL is underpriced.  What do we see they don’t?  Here is a representative opinion, from today’s musings:

    http://news.cnet.com/8301-27076_3-57341421-248/is-apple-vulnerable-in-2012-you-bet/

    People analogize to what they know.  In Apple’s case they analogize to Sony, Motorola and a lot of other once high-flying consumer device-makers who all suffered fast and furious declines in the face of transformative competition.

    What we understand far more than average investors is that Apple consumers are far, far stickier to Apple than any other device-maker in history, which make the analogies deeply flawed.  The stickiness comes from a combination of ecosystem effect, brand loyalty, and consumer satisfaction.

    Apple’s growth may soften a little in 2012 (or strengthen) but we know that the chance that Apple revenues IMPLODE like so many of its predecessors is remote.  AAPL’s PE suggests that most people believe imminent implosion is likely. 

    Stickiness of customers for consumer device-makers is a new phenomenon.  Those of us who “get it” can benefit from this understanding with investment dollars.

    Mac, I agree with your statement to a point, especially the part about consumer satisfaction.  There’s a formula that can determine future share based on comparisons of competing consumer satisfaction rates.

    Where we diverge is here.  There are two types of investors.  The first being retail, and the second institutional.

    Both are hampered by the amount they can invest, the retail investor in absolute terms (think 2008 wealth haircut), the institution through by-laws and government regulation.

    LongAAPL’s assertion that dividends and/or a DOW listing would increase institutional investment funds is right on, as many fund’s investment strategies are narrowly defined.  Buybacks do nothing to increase available investment capital.  Stock splits may have an affect, but I doubt it would be much, as the split would only attract investors with more limited funds, and total retail investment in AAPL is only ~30%.

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