Apple Intrinsic Value Is $800 Per Share According to Howard B. Aschwald, Portfolio Manager, Chief Investment Officer and Director of Research at Quantum Capital: Economic Margin and Intrasector Comparisons as an Investment Thesis

Wall Street Transcript

67 WALL STREET, New York - October 1, 2012 - The Wall Street Transcript has just published its Investing in Energy and Other Strategies Report. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investing in Energy - Investing in Technology - Oil and Gas E&P - Value Investing

Companies include: Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), International Business Machine (IBM), Apple Inc. (AAPL), Trimble Navigation Ltd. (TRMB), Microsoft Corporation (MSFT) and many others.

In the following excerpt from the Investing in Energy and Other Strategies Report, an expert portfolio manager discusses his investment methodology:

TWST: Would you give us some specific names you like right now?

Mr. Aschwald: Let's talk about Apple (AAPL). That's one that we have in a couple of different strategies, and now that it pays a dividend, it's in our dividend growth strategy. So I have an intrinsic value at $800 a share with our discipline using conservative inputs, that's a very reasonable number. Sometimes stocks stay undervalued for a longer period of time, so one of the other metrics we look at is economic margin change. So this year's economic margins, are they higher than last year's and will next year's be higher than this year's?

On the midcap side, we like Trimble Navigation (TRMB). Trimble is more than a GPS system. They automate location for things, like farm equipment, so it can operate automatically so you can have it almost unmanned. They are finding many more value-added location dependent applications, and it's not just the GPS for your car anymore.

Trimble is a smaller company, market cap $6 billion or so, and that's in our midcap growth strategy. I have an intrinsic value on that of $75 a share, it's around $50 right now, so it's still got a ways to go. Sales growth is still projected very nicely at over 13.5%, so that's one of the other characteristics we look to. A company must have higher sales and higher profits over a five-year period of time. All our bias is toward growth companies. What we try to do and have a discipline in is getting in at a reasonable price.

TWST: The key is figuring out what the reasonable price is?

Mr. Aschwald: Correct. And that's why you have to have an anchor in there, or a unique discipline, to calculate intrinsic value. Other people use discounted cash flow metrics or EPS estimates and things like that. So many other people are doing that. I don't want to go that route. I want to have another kind of metric to see the world a little bit differently. That's why we put so much emphasis on this economic margin, if you will, true economic profits.

In the hedged equity strategy, I should point out the underlying stock portion of that portfolio is our dividend growth strategy. So that's what we are using the hedge against. We are able to use index options to protect that. We use the SPY options, very efficient. And these are options that trade hundreds of thousands of contracts a day, so it's a very liquid, very deep market. Because our underlying dividend growth strategy tracks pretty well with the S&P 500, it's got a beta of about 0.90, hence it would move up and down proportionally when the market moves up and down. Using SPY is a very efficient way to hedge.

TWST: It's interesting because the general public may see hedging as risky, but what you are saying is that hedging reduces risk. Is that right?

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers, and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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