Sunday 11 November 2012

The Life Cycle of a Stock: Apple Inc

Using historical data the illustration below shows the estimated returns on Apple stock (AAPL).

The estimated returns are based on the following formula:

Estimated Returns = Adjusted Yield + Growth Rate - Adjustment Rate

  • The Adjusted Yield is the Dividend Yield plus half of the companys' retained earnings. For more information on the Adjusted Yield see here.
  • The Growth Rate is analyst forecasts discounted by 50% and capped at a maximum of 15% growth per annum. 
  • The Adjustment Rate is used for stocks with a Adjusted Yield below 6.5% and is used to offset the fact the stock may be overvalued. The formula is this:
 [ (Adjusted Yield / 6.5%) ^ 0.1 ] - 1

Comments

In 2007-2008 Apple's earnings were low given the stock price (EPS 2007: $4.04, 2008: $5.48) resulting in the stock looking overvalued despite high growth forecasts. This gave a fairly average 6-7% expected return.
 In April 2009 the stock hit a 100 day high marking the end of the previous downtrend. Earnings had increased significantly although the stock price remained below its 2008 levels resulting in PE ratios in the low teens. At these levels the expected returns were around 15% a year which is high for our model.
 Earnings continued to keep pace with the stock price's upward momentum and analyst forecasts remained bullish resulting in the expected returns remaining around the 15% level for 2010 and 2011.
 In 2012 the stock was starting to look less attractive as an investment. The PE ratio remained low but analyst growth forecasts going forward were lower than previously giving an expected return in our model around 10%.
 At the beginning of November the stock broke a 100 day low, possibly signalling the beginning of a downtrend. At the price of $574 a share the stock looks modestly priced with an expected return of 6.3%.

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