Why It's Not Too Late to Buy Apple Inc. (Nasdaq: AAPL) Stock

While many investors were bailing on Apple Inc. (Nasdaq: AAPL) stock last summer, Money Morning Capital Wave Strategist Shah Gilani was recommending it.

nasdaq: aaplGilani, a retired hedge-fund manager who runs the Capital Wave Forecast and Short Side Fortunes advisory services here at Money Map Press, often makes counter-intuitive picks; the same day he made his call on Apple, he recommended Microsoft Corp. (Nasdaq: MSFT).

Since then, Apple stock is up about 24% and trading at about $525 a share. And yet Gilani still sees a lot of upside for AAPL.

Recently, Money Morning Executive Editor William Patalon III caught up with Gilani for an update on his summer recommendations.

Here's a partial transcript of that discussion.

William Patalon III (Q): You recommended Apple stock the same day you recommended Microsoft. And your timing was impeccable...

Just to underscore that point ... shortly after you recced Apple, raider-turned-"activist-investor" Carl Icahn announced that he'd taken a big stake in the company - it eventually grew to something more than $2.5 billion - and began pressuring CEO Tim Cook to boost the dividend and buy back stock. The company had a pretty successful iPhone launch, cut a deal with China Mobile Ltd (NYSE ADR: CHL), and has made a bunch of intriguing tech acquisitions.

You recommended that stock at about $420, and it ran up as high as $575 - a gain of about 37%. Investor ardor has cooled a bit - folks have gotten impatient about "what's next" - but we're still up about 24%.

What do you see next for AAPL stock?

Shah Gilani (A): You know, Bill, getting this chance to talk with you about these recommendations is an interesting and useful exercise for me. It's allowed me to go back and review my initial investment cases. And it serves as a reminder just how alike - from an investment standpoint - Microsoft and Apple really are.

Patalon (Q): That's a statement that's going to fluster a lot of Apple and Microsoft fanatics...

Gilani (A): It very well might be, Bill. But from an investment vantage point, it's also very true. Remember when I explained how MSFT shares will get to $100? Well, I use the same metrics and calculations on AAPL stock. And let me tell you: Apple's cash hoard makes Microsoft's appear middle-income by comparison. And the Cupertino-based iDevice maker's FCF (free-cash flow) and CROIC (cash return on invested capital) is fantastic.

Apple is right now sitting on about $160 billion in cash ... that's right, $160 billion.

We can talk about products, or screen sizes, or product cycles, or anything having to do with Apple's awesome "ecosystem" and how all those pieces work so well together... and we can talk about how the company is going to grow its whole ecosystem in the future... but let's face it - that's what everyone talks about.

What Expert Cash Management Is Doing for Apple (Nasdaq: AAPL) Stock

Gilani (A): Let's take the whole notion of the Apple ecosystem as an unknown. I take it as a partial given, but let's take that all as an unknown.

And let's look at something that no one else seems to be paying attention to...

Patalon (Q): Or isn't looking at in the way that you would ...

Gilani (A): Right. To begin, let's look at Microsoft again. Remember, I said these were very similar investment cases.

Microsoft has managed to continue to generate cash for a far longer period of time than Apple has to date - even with the relatively stale stable of MSFT products. If nothing else, Apple is going to continue to generate cash in that very same manner.

Let's talk about Apple's application of cash to move the stock price. Okay, Apple pays a dividend and that costs the company $10 billion a year. But it's a reason people now own the stock - you know, for the yield. That's a stock-price-floor-setting apparatus. So what is CEO Tim Cook & Co. going to do with Apple's excess cash to get the cost of the dividend down? They're buying back stock. They have executed about $28 billion in buybacks out of a declared $50 billion program. That's fantastic: Not only has the company retired 5% of shares outstanding; it's also put another "floor" under the stock by buying in on the cheap.

Patalon (Q): So it's kind of like ... Kudos to Cupertino?

Gilani (A): That's one way to put it, Bill. I mean, Cook & Co.'s timing has been brilliant. They aren't buying at the top of any range. They've been buying when the Price/Earnings (P/E) per share falls to between 10 and 13. Buying their own shares at less than a 13 P/E is genius. So to answer your question: What's next for Apple - besides new products - is just what's been happening recently - brilliant cash management. Any company with the base of devoted customers Apple has, with the history of product innovation that AAPL has, and that has demonstrated an ability to manage a gigantic cash hoard with the deftness that Apple has shown us... well, that's a stock that I will buy and hold all day every day.

Patalon (Q): The company has made something like two dozen acquisitions in the last year or so, and is keeping pretty mum about most of them. But I remember when we talked about all this deal-making last year, as it was unfolding, you took it as a sign that Apple was cooking up something pretty big.

Gilani (A): I do, Bill. And with the cash-management case we've already made, whatever Apple does to jump-start growth is, well, a major bonus.

You also don't want to miss Bill Patalon's Q&As with Gilani on Facebook and Microsoft!

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