Apple Inc. (NASDAQ:AAPL) stock has been on a tear for the last month, not just recovering from the same correction that hit the rest of the market but making up for three months of weak price performance. As far as tech companies go, Apple wasn’t particularly expensive to begin with (it still has a trailing PE of just under 17x), but the rally reminded us of a value investor who garnered a lot of publicity this summer for warning investors that tech companies like Apple can become obsolete surprisingly quickly.
Apple’s ‘Make-believe’ valuations
Back in July, Noster Capital managing partner Pedro de Noronha said that he couldn’t see any reason to buy into the tech sector’s ‘make-believe’ valuations, where anything north of 25x could easily jump into triple digits before falling back to earth. He caught flak for a comment about Apple Inc. (NASDAQ:AAPL) becoming obsolete in 2 – 3 years, which turned out to have been taken out of context (he wasn’t making a 3-year prediction, just saying the timeline for a tech company to fall from grace is shorter than people realize).
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Apple Inc. (NASDAQ:AAPL), the biggest company on the planet with an avid core customer base, lots of cash, and a valuation in the teens, isn’t a good example of wild valuations, but the ‘make-believe’ comment was actually directed at Netflix, Inc. (NASDAQ:NFLX) specifically, which dropped like a rock in the middle of October and is still valued at more than 100x earnings. Lumping Apple in with a hot stock like Netflix looks like a mistake (Icahn and Einhorn, for example, have been onboard with Apple for a while now), but there was a point to be made.
Noster down 12.9% through September
Like value investors everywhere, Noronha expects his investments to underperform during a bull market because he is playing defense as the top approaches and other investors are enjoying the paper gains that will disappear in the next downturn.
“By their nature hedge funds will normally trail the indices on strong market advances for the same exact reasons that they will outperform during corrections,” Noronha and Jeremy Attard-Manché write in Noster’s September newsletter. “There are of course a few luminaries that manage to have the correct net exposure throughout the cycle and who are world class alpha generators, but most managers are not, and that alone does not put them in the penalty box as long as they beat the market (after fees) over a full market cycle.”
That’s fair enough, the problem is that Noster Capital was founded in 2008, so we don’t have a full market cycle to look at. What we can see is that the fund fell behind last year’s incredible bull market and is actually down 12.9% for the year through the end of September, according to a letter to investors reviewed by ValueWalk.