As Apple gears up to report fiscal Q1 earnings on Thursday, January 27, CNBC’s Mad Money host Jim Cramer weighed in on Apple stock (AAPL) - Get Apple Inc. Report. He used an unorthodox comparison to Clorox (CLX) - Get Clorox Company Report to argue that Apple can be thought of as a defensive stock.
Today, I dig deeper into the argument and explain how Jim Cramer could be right (and how he may be wrong) in his assessment.
(Read more from the Apple Maven: Apple Stock: A Better Deal Now, But Is It A Buy?)
AAPL: the defensive argument
During a recent roundtable discussion about a few key stocks, Jim Cramer talked about the idea of FAAMG (or whatever acronym one chooses to use to refer to Big Tech companies and stocks) being defensive in the current market environment. He started with media and communication giants Meta Platforms (FB) - Get Meta Platforms Inc. Class A Report and Alphabet (GOOG) - Get Alphabet Inc. Class C Report.
Jim pointed out that these two Big Tech names have been trading at ex-cash earnings multiples of less than 20 times. This compares to Clorox’s 31 times, which is much more aggressive. While the latter tends to be thought of as a defensive play, the tech stocks may look much more so from a valuation perspective.
Then, the host of Mad Money moved on to Apple. He described Clorox as a “miss quarter, miss quarter, miss quarter” company, while Apple was a “make quarter, make quarter, make quarter” one instead. Because of the consistency in delivering solid results, Apple could be considered defensive.
Apple’s earnings day is just around the corner. Will the company “make quarter” this time again? And if so, will Apple stock react well?
Is Jim Cramer right about AAPL?
In my view, Jim Cramer makes a good point. Now is an environment of high inflation and rising interest rates. While this is generally bad news for most stocks, the companies that can consistently deliver strong results and grow top and bottom lines should do just fine.
When it comes to financial and operational performance, Apple is a top-of-mind name. Demand for the company’s products and services has not waned much, even past the thick of the pandemic and stay-and-home trends — I have recently talked about the Mac as an example.
That said, there is one key reason why traditional defensive names often trade at rich multiples. Many of them respond better to periods of macroeconomic distress. Therefore, they command higher multiples for their “anti fragile” feature.
Think of PepsiCo (PEP) - Get PepsiCo, Inc. Report as an example. It trades at a rich 2022 P/E of 25 times with only around 6% to 9% in projected EPS growth through 2025. The valuation begins to look reasonable, however, if one considers that PEP has barely lost any value during the 2022 broad market correction.
Therefore, I agree with Jim Cramer that AAPL is probably a defensive stock when one thinks longer term. Higher rates and inflation will likely not dent the Cupertino company’s business fundamentals or Apple stock’s returns over a multi-year period.
But AAPL investors should still be comfortable weathering short-term volatility and pullbacks. In that regard, Apple shares are far from defensive, as their price stands about 12% lower than the all-time high reached only three weeks ago.
Is the price right?
Looking at a company’s business fundamentals is only half the work needed to find a good stock. How much one pays to own the shares is a key factor in the success of any investment. This is why valuation analysis is so important.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Apple Maven)