Apple: Time To Trim Back My Biggest Holding?

By Libardo Lambrano

As the first half of 2013 comes to a close, I decided to take a step back and review my Dividend Paying Large Cap portfolio and key activities year-to-date. I have made a few major new investments this year, but for the most part am pleased with the results I’ve seen in the first half of 2013 from my ‘slow and steady’ approach to investing.

In April, I consolidated my portfolio and liquidated some of my holdings, not because of any deterioration in the underlying securities, but because I believed (and still do) that there are better opportunities available in the current market.

In May, my only addition to my portfolio was Oracle (ORCL).

In my personal opinion, ORCL will probably continue to outperform the rest of the market for the remainder of the year for three main reasons:

  1. The exponential propagation potential of cloud computing systems and processes.

  2. Expanded loyalty base as it becomes increasingly difficult for companies to easily move their data storage from one provider to another.

  3. More frequent hardware and software updates due to mandatory upgrades typical of subscription models.

You can read a more detailed explanation of why I think Oracle is a good stock here.  Two of the things I like most about Oracle are the company’s commitment to buying back stock, and the competitive return on equity. Both of these factors are green lights for me when I buy any stock on the market.

In terms of my sellouts, I have a few thoughts. I believe Coca Cola (KO) and Pepsi (PEP) are great companies, but after a positive first quarter in 2013, they started to look a little bit too expensive as compared with other equities on the market today.

So far I believe this rebalance in my portfolio is working quite well.  As of May 31st, 2013 my portfolio is up 3.9% (net of fees) while the S&P 500 Index is up 3%. This will be the second consecutive month where my portfolio has outperformed the S&P 500 Index.

In 2013, my largest holding continues to be Apple (AAPL), which accounts for about 11% of my portfolio. However, as we move into the second half of 2013, this is a stock that I have under close observation and will plan to downsize if the company doesn’t release any new products by 2014 (which I doubt they will).

Apple has an incredible market advantage when releasing new products and services, but in my opinion, it is taking the company too long to capitalize on this advantage. I think an Apple-powered streaming music service that can compete with Pandora (P) and Spotify is long overdue, as is a new iPhone with NFC (near field communication) capabilities at a lower price point.

I believe the release of the Apple TV is taking too long as well, and in delaying the release, Apple is allowing their competitors to catch up. Samsung now offers smart TVs with Internet access and apps.

If Apple doesn’t launch their version soon, people may get too comfortable using Samsung’s version and not care about what Apple has to offer.  If Apple releases any product this year, I believe that alone would be enough to take the stock to new heights (as any new product release almost inevitably does).

I look forward to seeing how everything plays out this year. If things stay the same at Apple by December though, I may reduce my exposure in 2014.

As we move into the second half of 2013, a position that I will be closing is Occidental Petroleum (OXY). This month the company reached its historic average valuation. The PE 10 (current stock price divided by the average of the last 10 years of earnings per share) is 17.06, while its PE ratio is 17.37.

OXY's price is 0.77% under its historical valuation, and based on my calculations, the fair price of OXY should be $95.  This is fairly close to the current price. The way I calculate the fair price is as follows:

First, I calculate the fair value of a company by combining two valuation methods. The first method is the PE valuation method. This valuation method corrects for any recent price appreciations or discounts by assuming that the value of the company will be in line with its historical valuations based on PE ratios. In the case of OXY, the fair price would be $76.56. (PE Ratio 5 year average 14.11 x earnings per share $5.42)

The second valuation method I use is the PS valuation method that applies a historical average of median Price to Sales Ratios to current trailing 12 months sales numbers. According to this method, the fair price of OXY would be $113.44 (PS ratio 3 years average 3.839 x Sales per Share $29.55)

I then average the fair value of both valuations - in this case, the PE valuation method ($76.56), and the PS valuation method ($113.44). The average of these two valuations is $95.

As I look ahead to the second half of 2013, I think now is the time to rebalance my stock portfolio further. I believe there are other stocks with better opportunities right now.  I look forward to scouting them out and sharing my findings in future posts.

The investments discussed are held in client accounts as of May 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

Libardo Lambrano

Libardo Lambrano

I am a value investor, an investment philosophy that boils down to investing in undervalued, under-researched and unpopular companies. Reasons

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