Does AAPL pass the Growth Investing Strategy test?

November 11, 2010 | Comments (4)

Written by

Jae Jun

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Growth Investing Strategy – AAPL passes

Growth Investing Strategy

The AAPL Growth Investing Strategy

Growth Investing Strategy for AAPL

You may already know Validea, but I recently saw their guru analysis and found it intriguing.

I’ve always been a fan of new stock valuation methods, checklists or strategies. The Guru checklists they offer is just my style when it comes to learning new analysis methods and seeing the framework of famous investors thought and analysis process.

But I figured that you don’t have to pay for something so simple because I can replicate the same checklist with the free stock spreadsheets or the premium stock valuation spreadsheet.

The prominent theme on Old School Value for a while will be looking into these strategies and checklists of guru’s. That way you can get an idea of what the pros looked at and decide whether it is worth implementing into your own investment checklist and strategy.

Guru Growth Investor – Martin Zweig

Value vs growth.

Most of the stuff you read from me is based on value investing. Pure growth stocks is something that I haven’t dabbled into.

To me value is buying something deep in the sale box for 50c and then selling it for $1. It may take a while and sometimes I end up with a dud, but in the end, there is usually a buyer.

Growth on the other hand is like buying the iPhone4 the day it comes out and then selling it to the person at the end of the line for twice the amount. This too usually has a buyer on the other end.

Either can work, but it is a matter of personality and preference.

Martin Zweig was a growth money manager back in the 1990′s as well as an investment newsletter writer. For Zweig, his growth strategy worked and his clients benefited. He was named stock picker of the year 2 times in a row and wrote a book titled “Winning on Wall Street”, which outlines his investing strategy.

Zweig’s basic investing strategy is to be fully invested in the market when market indications are positive (bullish) and to sell when the indications become negative (bearish). He places heavy emphasis on risk minimization and limiting losses.

The fact that he was able to generate returns of 16% per annum compounded return between 1980 and 1995 is impressive in itself.

Zweig focused on growth stocks, market timing and technical analysis, but what is it that made him so good? You may not agree with his style, but the numbers don’t lie.

I won’t be getting into his theories on market timing and technical analysis. Way too complicated for me.

If you already read the book or know that “the trend is your friend”, you don’t need an introduction at all. For other people like myself, might as well try and discover something to apply.

Martin Zweig’s Growth Investing Checklist and Framework

Martin Zweig’s religious focus was to check earnings consistency, trend and acceleration. The following points help to view the stock from different angles.

1. P/E Ratio [Pass]

“The data going all the way back to the 1930s show conclusively that stocks with low price/earnings ratios outperform stocks with high price/earnings ratios over the longer term”. – Martin Zweig

  • Must be greater than 5
  • Cannot be more than 3 times the current market P/E
  • Never greater than 43

AAPL has a trailing 12 month P/E of 21. The current market P/E is roughly 17 so the first test is a pass.

2. Earnings Trend [Pass]

“If a company can show nice consistent earnings, I don’t care if it makes broomsticks or computer parts.” – Martin Zweig

  • Revenue growth cannot be significantly less than earnings growth
  • Revenue growth should not be due to cost cutting or something non sales related

AAPL’s revenue growth from 2009 to 2010 is 52%. Earnings growth rate is 67%.

The past 5 year revenue growth is 36.5% compared to a 5 year EPS growth of 58%.

The 5 year revenue growth is much lower than the EPS growth, but seeing as how the latest full year revenue growth rate exceeds the 5 year average, this criteria becomes a pass.

3. Quarterly Revenue Growth Rate [Pass]

  • Quarterly revenue growth must be greater than the previous quarterly growth
  • Growth rate between current quarter EPS to the same quarter a year ago must be positive

The EPS growth for AAPL between this quarter and last year’s quarter comes out to be 66.7%.

4. Current Quarter EPS [Pass]

  • EPS must be positive

Current diluted EPS of $4.64 is positive which passes this test.

5. Quarterly EPS from Last Year [Pass]

  • Quarter EPS from the same period last year must be positive

AAPL had an EPS of $2.77 the same period last year.

6. EPS Growth from 3 Quarters Compared to Past 3 Quarters [Pass]

  • Growth rate of the latest 3 quarters compared to the same 3 quarterly period in the previous year

Growth from the last 3 quarter was an astonishing 67.5% compared to last years same 3 quarterly period EPS growth of 66.8%

7. EPS Growth Over Past 5 Years [Pass]

  • EPS should increase easy year for the past 5 years

Over the past 5 years the EPS has been 2.27, 3.93, 6.78, 9.08 and 15.15. Easily passes this criteria.

8. Long Term EPS Growth [Pass]

  • EPS growth over 5 years should be greater than 15%

With EPS growth at 57% over a 5 year period, AAPL clearly passes this test.

The Perfect Stock for Martin Zweig and Growth Stock Investors

As you can see from the items above, Zweig puts most of his focus on earnings. As a value investor, earnings doesn’t play that much of an important role but since EPS is what Wall Street looks at, it can’t be completely ignored.

AAPL passes all of the tests hands down.

No doubt that Martin Zweig would have owned AAPL if he was still managing money.

Disclosure

None

  • Georgie Best

    Hey Jae,

    Would like to see a Tab for growth investors on the spreedsheet personally. Growth can flow to cash flow if controlled correctly. I understand it may distract from a pure value play and possible AAPL was never a pure value play but it did increase shareholder wealth along the way.

    I looked the survey but did’nt see a growth option.

    On a side note I have read a few sell side notes that Android, is going to cause some major problems for apple with it’s open op system and non retail store approach hence lower cost base. It’s intresting how a lot of apples numbers are very close to the prior numbers…ALA Dell!

  • http://www.oldschoolvalue.com Jae Jun

    I do intend to include the Guru checklists into the spreadsheets. I don’t know whether it will be suited to growth investors but definitely should help for people interested in growth opportunities.

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