Apple Shares Now Nearly As Cheap As Microsoft: Which Would You Rather Have?

That’s right. With the recent share price plunge in Apple (AAPL), from over $700 to around $525, the stock is rapidly approaching the valuation of 1990’s tech darlingĀ Microsoft (MSFT). While clearly facing near-term headwinds, both on the product side (a narrowing of their technological lead over rivals) and the financial side (fiscal cliff, tax-related selling before year-end), among others, I find it hard to make an argument for why Apple should not trade at a premium to Mister Softee. To be fair, Apple still fetches slightly more if you go out to one decimal place, with AAPL trading at 6.4 trailing cash flow, versus 5.7 times for Microsoft. If Apple shares fell another 8% or so, to around $485, and MSFT stayed around $27, both would trade at 5.7x trailing 12 month EBITDA. Still, investors are having a hard time understanding exactly how sentiment on Apple has shifted so much in just a few short months.

Now I know many people come to this blog to discover new investment ideas, and Apple definitely does not qualify. However, since contrarian investing is one of my core tenets, I think it is important to point out that Apple shares are dirt cheap right now. In order to justify a lower stock price, say one or two years from now, you have to think that Apple’s sales and earnings have peaked and are headed down from here. While that is not an impossibility, especially in the world of technology, I think it is far more likely that Apple’s market share gains slow and level off going forward. Even in that case, the end markets they serve as going to grow nicely over the next few years. As a result, I don’t envision their financials petering out from here, though for a company of this size, the hey days of rapid growth are clearly over.

For those who aren’t sure such prognostications will prove true, consider again the comparison with Microsoft. Regardless of Apple’s position relative to Google, Samsung, and the like in the coming years, is Microsoft really as well positioned? I don’t think so. Even a bet that Apple will outperform Microsoft, given their stocks are nearly identically priced, is a bet investors can make in the public market by shorting one and using the proceeds to go long the other. iPod versus Zune? iPad versus Surface? iPhone vs Windows Phone? It’s not a bad play.

Although discussing large cap tech titans like AAPL and MSFT hardly uncovers anything new for curious investors, I definitely think today’s share price on Apple is worthy of discussion. The recent 200 point decline seems very overdone to me, based on what is happening out in the tech marketplace. The last time I updated my fair value for Apple stock I got a number with a “7” handle on it. Nothing has changed since then, and for the first time in a long time, I am actually looking to add to the stock in client portfolios.

Full Disclosure: Long Apple and no position in Microsoft at the time of writing, but positions may change at any time

Why 6.5% Unemployment Is The Fed’s Magic Number

Today Ben Bernanke and the Federal Reserve announced that they would keep the fed funds interest rate near zero as long as the unemployment rate remained above 6.5%. Why pick that number? They did not say for sure in their press release, but I can take an educated guess. Over the last 40 years, the unemployment rate has averaged exactly 6.5% in the United States. So Bernanke and Co. are going to keep rates ultra-low as long as unemployment is above-average.

I would also point out that the 6.5% level as the long-term average is important to keep in mind as we envision what a “normal” U.S. economy looks like. Some people may mistakenly think that 4-5% is typical or common just because we got down to those levels during the dot-com and housing bubbles. That is definitely not the case. A normalized economy is 3% GDP growth (vs 2.7% last quarter) and UE at 6.5% (vs 7.7% last month). So while we are not quite at a normalized level of economic growth and employment right now, we are not as far away as many (especially in the political arena) would have you believe. Perhaps that explains why corporate profits are slated to reach a record high this year, surpassing the prior record attained just last year.

Would Going Over The Fiscal Cliff Really Be That Bad?

Easily the most frustrating thing about being a long-term investor nowadays is how short-term focused Wall Street has become in recent years (or more accurately, the last two decades). Quarterly earnings reports and whether companies slightly beat or slightly miss estimates made by a bunch of number-crunchers in New York result in huge share price volatility. Owners of real businesses would be the first to tell you that small quarter-to-quarterly fluctuations in sales and profits are far less important than the long-term strength, viability, and competitive position of their companies.

Political leaders have the same problem; they are obsessed with the short term because they are up for reelection so frequently. If you listen to the media, or your elected representatives, you would think going over the fiscal cliff would be absolute catastrophe. But is that actually true? Well, it depends on whether you care about the short term or long term outlook for the finances of the United States.

The Congressional Budget Office (CBO), the non-partisan fiscal accountant for Congress, projects that the U.S. would fall into a mild recession if we went over the fiscal cliff, and that the unemployment rate would rise from 8% to 9% in 2013 as a result. In 2014, the economy would return to growth, much like we have today. That is the short-term impact. And yes, that is a bad outcome for politicians currently holding office.

But what about the long-term view? Are there any positive effects that might make it worth it to have a short, mild economic downturn in 2013? This is a question the media and politicians rarely speak about. For instance, did you know that without any actions to blunt the impact of going over the fiscal cliff, the U.S. budget deficit ($1.1 trillion in fiscal year 2012) would fall 43% from 2012 to 2013. In 2014 it would fall another 40%. In 2015 it would fall another 45% (all figures are current CBO estimates). At that point, the U.S. federal budget would essentially be balanced. The deficit problem would vanish within three years, and that is if we do absolutely nothing! Congress could actually accomplish something important by not passing a single piece of legislation!

One could easily argue that the best long-term outcome for the U.S. economy would be to have a balanced budget within three years, even if it meant taking some short-term pain in 2013 as tax rates reset to Bill Clinton-era levels. But nobody is taking a longer term view. Everyone is acting as if they are on Wall Street and care only about the immediate future. There is absolutely no chance that our country’s leaders do nothing and balance the budget, even though they would all agree that $1 trillion annual deficits are unsustainable and are easily the biggest problem the U.S. faces in the intermediate term.

Instead, we should expect that politicians will opt to extend most of the Bush tax cuts and postpone or eliminate most of the planned spending cuts. Such a plan would do nothing to reduce our deficits and sets us up for much bigger problems a few years down the road. What people don’t seem to understand is that the debt crisis that will arise from $1 trillion annual deficits year after year is many times worse than the relatively mild 2013 recession that inaction on the fiscal cliff would cause. Don’t believe that? Just ask Greece or Spain, where unemployment rates are over 25%.