Jensen Quality Growth Fund’s Holdings Update – Buy Apple Inc. (AAPL)
The Jensen Investment Committee recently added Apple to the portfolio. Apple is a well-known, global consumer electronics company.
Walter Schloss’s Wisdom
Walter Schloss was a legendary value investor and some might call him the last traditional value investor. Schloss was an old school value investor. He looked for bargains on a price-to-book basis, preferring stocks that were trading at 52-weeks lows over other opportunities. He spent several years working with Benjamin Graham before moving off to Read More
Over the years, we’ve answered the question many times as to why we didn’t own Apple. Quite simply, it didn’t achieve 10 consecutive years of greater than 15% return on equity. Last year it qualified. After running it through our research process, we added it to our portfolio bench because we believe it possesses the qualities we seek in a quality growth company including durable competitive advantages, strong free cash flow, a seasoned management team, and an attractive growth profile.
Fundamentally, we believe the company’s competitive advantages such as its iconic brand, innovation, and economies of scale are sound. Additionally, we believe Apple enjoys a network effect from the apps and services business that in our opinion is strengthening as the company provides more services such as Apple Pay and Apple Music.
Financially, Apple is robust in our opinion. The company has over $200 billion in cash and equivalents on the balance sheet. Apple comfortably generates more cash than it needs and returns a significant amount to shareholders via dividends and share buybacks. While, the company has generated high double digit topline and bottom line results in the past, such results will likely slow but stabilize into what we believe is an attractive growth profile where Apple can continue to deliver consistently high returns on capital.
Despite the loss of Steve Jobs, current CEO Tim Cook and his team have proved themselves highly effective in driving the company forward by launching new products such as the Watch, upgrading existing product platforms, and expanding services and apps. We feel the current team is appropriate to guide Apple as it navigates its future.
We believe now is the time to add Apple to the Jensen Quality Growth Fund not only because of its attractive valuation and strong fundamentals, but because our sense is the company is at a transition point. We see it evolving from primarily a premium consumer electronics company to one that offers a robust ecosystem of apps and services that serve to enhance customer monetization over the life of the relationship and increase customer switching costs from the Apple ecosystem. While this business is just under 10% of Apple’s revenue, we believe its high margins can enable Apple to preserve and even enhance the company’s overall margins if lofty device margins become pressured in the future.
In sum, we are pleased to add Apple to the Jensen Quality Growth Fund. We believe its balance of competitive advantages, financial strength, and an effective management team make it a worthy addition.
Fund holdings are subject to change and should not be considered recommendations to buy or sell any security. For a listing of the funds current holdings, please click here.