New Constructs CEO David Trainer and Oliver Portia of Ruderman Brothers debate Apple's 11% pullback. Portia sees value in the low P/E multiple and upcoming iPhone launch. Trainer warns Apple has hit saturation, with a drying innovation pipeline and risk that lost product breakthroughs could erode customer loyalty and profitability.
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Let's move on and start with Apple. The stock down about 11%, as we said, since its February record close.
David Trainer from New Constructs recently sold his position in Apple and sees more downside. He joins us now alongside Oliver Portia from Ruderman Brothers, who sees the sell-off as a buying opportunity. Welcome to you both. Oliver, let me just start with you. Why are you convinced that Apple's a good buy here given the price action? Just on that basis alone, aren't you worried?
Well, in the short term, it can go down further. There's no question about it. But, Kelly, I look at it this way. You've got a stock. That's very attractively valued on a PE and a price-to-cash-flow basis. Tremendous cash hoard. They've got a— they've got a rising dividend, share buybacks, and they've got some interesting product launches coming up. You've got a high-margin Apple iPhone being released in September because it's not a big rebuild in terms of technology. And then, of course, there's the speculation that they're going to spin off or somehow do something with iTunes, which could be huge. So all of So all in all, I think Apple is a great holding for somebody who's looking for growth in their portfolio on a safe basis.
So all good points, Oliver. So why is the stock going down?
Well, I think that there's a few issues with the stock in the very short term. So I think, as is typically the case— and let's remember, Apple is up some 75% in the last 2 years, so it's not exactly something to cry over— but you've had some outsized expectations. And so it's the reality catching up with the expectations. It's going to come down a little bit. To me, this is the point where you want to buy Apple, but you want to be a long-term holder. The stock. This is not a short-term play. If you're in it for the short term, then it's risky.
All right. So, David, when and why did you sell your shares of Apple?
Well, we think it's sort of at a technical tipping point. I mean, everybody and their brother owns Apple. It's a disproportionate share of a lot of funds. It's sort of kind of reached its technical max. And the fundamental story that I've been talking about over the years really hasn't changed. And that is that, look, there's a lack of innovation coming out of Apple and they have a very loyal, very loyal customer base because of the innovation in the past. But the longer and longer between sort of innovations, the less loyal that customer base can be expected to be. And when you have returns on capital as high as Apple does, it means the bigger you are, the harder you fall. I mean, they're at 180%. When that customer base is no longer as loyal, they could see a major drop in profitability. And I think that could have some significant repercussions on the stock.
Clearly, you've had a love-hate relationship with the stock, David. You didn't like it until last October. You got back in. Now you're getting back out. But you got in because of the coolness factor. You had to acknowledge that even though you're not impressed with the products, you have to acknowledge that there is a coolness factor that people— that brings people back. Very rabid fan base that Apple has these days.
That's right, Bill. You know, the same is true of some of the investors. You know, if you say negative things about Apple, you might get a death threat or two. But yeah, I think, you know, the Apple story has been more about marketing than it has been about product over the last couple of years. And that marketing success is basically built on the awesome innovations that Apple created over the years. We haven't seen those in a while. So to expect the loyalty to maintain— be maintained despite the lack of innovation, I think may be a little naive. And look, we know the customer attitudes can be pretty fickle sometimes. I mean, we see— we saw how fast, quickly Facebook put MySpace out of business. I mean, you're just one great innovation from putting something, you know, to bed. And so you've got to be careful.
Oliver, if you put your Carl Icahn hat on for a second, what letter do you write Tim Cook here? What do you want to see him, if anything, do with this?
Oh, I think what David just said is very important. Important and very accurate. So, you know, Apple's problem used to be launching product on time. They fixed that and innovation did suffer a little bit, especially on the software side. I think they're on the precipice of getting back on track there. And that's why I'm much more optimistic than he is. But certainly on a long-term basis, if they don't continue to innovate, that is going to be an issue. And that's why you always want to be active and not just buy it and forget it.
All right, gentlemen, good to see you both. Thank you. Hot topic right now. We'll keep an eye on Apple, see how it does in the coming days here.
