The hidden story behind Apple’s growth concerns…

From Justin Brill, Editor, Stansberry Digest:

Warren Buffett’s Berkshire Hathaway (BRK) just announced a surprising new bet…

The company reported yesterday that it had taken a $1 billion position in consumer-technology giant Apple (AAPL) in the first quarter of the year.

The news pushed shares up nearly 4% and added a massive $18.4 billion to the company’s $500 billion-plus market cap.

But according to multiple reports, it wasn’t Buffett himself who made the investment. It was his Berkshire Hathaway “heirs” – former hedge-fund managers Todd Combs and Ted Weschler – who many believe are likely to run the company’s stock portfolio when Buffett retires.

The move also represents a departure for Buffett’s Berkshire, which has always avoided technology stocks – outside of its big 2011 investment in IBM (IBM). As the Wall Street Journal reported earlier this week…

Mr. Buffett has long voiced his aversion to investing in technology companies. Four years ago, he specifically ruled out investing in Apple.

But Todd Combs, who joined Berkshire in 2011, and Ted Weschler, who arrived a year later, have shown a willingness to wade into corners of the market that Mr. Buffett won’t touch, including the tech sector.

The investment shows the amount of rope Mr. Buffett is willing to give his protégés, as the legendary stock picker, who turns 86 years old in August, prepares Berkshire for a future without him at the helm.

Hedge-fund manager David Einhorn and billionaire George Soros also disclosed big purchases of Apple stock during the first quarter.

These large buys follow news late last month that billionaire activist investor Carl Icahn had sold his entire position in the company.

Regular Digest readers know several Stansberry Research analysts have been bullish on Apple for months now. Given its recent performance, you may be wondering if that’s still the case.

After all, shares have been incredibly volatile of late… the company just posted its first quarterly decline in earnings in 13 years… And before yesterday’s news, the stock was sitting near multiyear lows.

In his latest issue of Retirement Trader (published last Friday), Dr. David “Doc” Eifrig explained why he remains incredibly bullish on Apple today…

Sometimes you can get too big for your own good. Apple has flirted with being the largest company in the world for a while. The consumer-tech giant makes some of the best and most successful products in the world.

That’s the problem. Nearly everyone who wants an iPhone (and can afford it) already has one in his or her pocket. Now that the company has sold 821.8 million iPhones, the question becomes: Who’s left to buy one?

This quarter, for the first time since 2012, Apple missed earnings expectations. Year-over-year revenue declined for the first time since 2003. Shares fell from around $104 to $95, and they’ve since drifted closer to $90.

As Doc explained, Apple’s growth clearly appears to be slowing today. But there’s more to the story.

First, just because Apple had a terrible quarter doesn’t necessarily mean it can’t grow. In particular, Doc noted that China alone deserves most of the blame for the poor quarterly results…

Sales in China fell 25.8%. Apple reported mixed sales everywhere: up big in Japan, down less severely in Europe and the Americas.

Now, we can’t predict what will happen with China’s economy. It may get worse. But company struggles that come from a particular economic shift in one country should worry you less than if customers around the world stopped liking its products.

People still love Apple. And they’re going to keep replacing their iPhones every two years.

But more important, Doc says it doesn’t really matter…

Apple is already a $500 billion company. Businesses that big will inevitably struggle to keep growing. Even if Apple’s growth isn’t slowing today, sooner or later it will. That shouldn’t be a surprise to anyone.

Yes, stocks are priced for growth… In general, the more a stock is expected to grow, the greater the premium investors are willing to pay. But Doc says that doesn’t mean a business with little to no growth can’t be a fantastic investment. It just means you have to buy it at the right price.

So… what is Apple worth?

According to Doc’s research, even if Apple grows cash flows by just 1% a year going forward, it could still be worth hundreds of billions of dollars more than its current $500 billion valuation.

In addition, he notes that between dividends and buybacks alone, Apple will return $83 billion a year to shareholders over the next three years. Even if earnings don’t grow at all, the stock should return 16% a year in “shareholder yield.”

And of course, these conservative estimates assign no value to the possibility that Apple comes up with another big hit like the iPhone or iPad. If the company somehow finds a way to develop an Apple car or some other blockbuster product, the company’s growth could take off again.

No matter how you look at it, Doc says Apple shares are extraordinarily cheap today. Even before shares plunged again following last month’s disappointing earnings, they were priced at just 5.4 times earnings before interest, taxes, depreciation, and amortization (“EBITDA”).

His bottom line for investors is simple…

No rational investor bought Apple with expectations of fast-growing revenue and earnings. Rather, he bought it for the cash flow and the yield. The folks who are selling because of this earnings report – and driving the price down – are reactionaries. They are selling on headlines. And they will regret it.

There’s no reasonable explanation for why Apple isn’t worth more than its current valuation.

People are obsessed with growth these days and are hypersensitive to the news. The headlines trumpeted Apple’s earnings miss as if it were the death of the company. Short-sighted investors sold. But Apple remains one of the most profitable and healthiest companies in the history of the world. No headline or tweet should cause you to forget that.

Regards,

Justin Brill

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