An Extreme Value Look at the 'Magnificent Seven'

An Extreme Value look at the 'Magnificent Seven'... Focusing on the biggest stock of all... The five essential financial clues for finding great businesses... Is Apple really a great business?... Is Apple a good investment at current prices?... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] An Extreme Value look at the 'Magnificent Seven'... Focusing on the biggest stock of all... The five essential financial clues for finding great businesses... Is Apple really a great business?... Is Apple a good investment at current prices?... --------------------------------------------------------------- I (Dan Ferris) have talked about [the 'Magnificent Seven' in the Digest]( a few times lately... That's the nickname for seven of the world's largest businesses. By now, I'm sure you know all the names... - Apple (AAPL) - Microsoft (MSFT) - Alphabet (GOOGL) - Amazon (AMZN) - Meta Platforms (META) - Tesla (TSLA) - Nvidia (NVDA) You probably also know these seven mega-cap stocks are the main reason the S&P 500 Index has soared this year. They make up about 30% of the benchmark index. As a result, the regular market-cap-weighted S&P 500 is up nearly 20% in 2023. But the equal-weight version of the S&P 500 (where every stock makes up 0.2% of the index) is only up around 6%. The difference is overwhelmingly due to the Magnificent Seven's performance. In a nutshell, I've acknowledged that the Magnificent Seven is full of great businesses. They gush cash. And there's a reason everyone knows their names. But I believe they're too expensive to be good investments right now. Their stock prices have soared out of sight. They won't give investors attractive returns over the long term. However, I haven't given Digest readers enough proof to support my beliefs. So far, the only evidence I've given to support my assertion that they're bad investments right now is their 2023 stock market performance and their exorbitant price-to-earnings (P/E) ratios. I don't use the P/E ratio when I'm analyzing a business, though. It's just a convenient metric that I know other investors recognize. And it serves my purpose well enough. That's going to change today. In this Digest, I'll show you what I mean when I say the Magnificent Seven stocks are great businesses that cost way too much right now. And my analysis will look exactly like it would for subscribers who pay thousands of dollars to read my monthly Extreme Value newsletter. In short, you're getting a free look into my investment process. I hope you find it valuable. A detailed analysis of every Magnificent Seven stock would take too long, so let's focus on the biggest one of all... I'm talking about Apple, of course. Apple is the world's largest company by market cap. That makes it important to most investors... You see, index funds that track the S&P 500 or Nasdaq inherently hold the largest stake in Apple. So anyone who buys shares of these funds in their 401(k) accounts is putting more money into this company than any other stock. This year, Apple became the first company to hit $3 trillion in market cap. It reached that milestone in late June. And it mostly stayed above that level until the pullback in August. Apple's stock peaked on in late July. At the time, its market cap was roughly $3.1 trillion. But then, the company lost roughly 15% of its value through its bottom in mid-October. Since then, Apple has rallied with the rest of the market. It's up about 17% from its bottom. With Apple's current number of shares outstanding, it hits a $3 trillion market cap at a share price of $192.90. It's at more than $195 per share today. So its market cap is about $3.05 trillion. Big numbers and record highs are fun. But I only want to know two things as a fundamental, bottom-up investor... - Is Apple really a great business? - Is Apple a good investment at current prices? Let's start by answering the first question. I'll use the "Five Essential Financial Clues" like I do before every recommendation in Extreme Value. As I remind investors each month... We use the Five Essential Financial Clues to help us identify great businesses. A great business doesn't necessarily have all five clues present. But the best ones tend to have more of them than less well-run companies. The first essential financial clue relates to a company's free cash flow... Again, in every Extreme Value issue, I remind subscribers how to find this clue in a business. Here's what I said this month, for example... A business's intrinsic value comes from the cash it generates in excess of all taxes, expenses, and enough reinvestment to maintain and grow. That's called free cash flow ("FCF"). The best businesses tend to generate more cash than they know what to do with. Before 2007, Apple's FCF was volatile – and occasionally even negative. But if you know anything about the history of technology, 2007 was a huge year for the company... That's when Apple released the first iPhone. And the business has gushed cash since then. Over the past four quarters, Apple generated roughly $100 billion in FCF. In fact, when you search for FCF on any stock screener, Apple is always the top company on the list. In sheer dollar terms, no other business consistently gushes as much FCF as Apple. Of course, it makes a lot of sense that the company with the biggest market cap in the world is also the biggest FCF gusher. The market isn't totally crazy, I guess. The second essential financial clue involves a company's profit margins... We live in a capitalist economy. So it's normal to see narrow profit margins (sometimes even down to zero) as companies compete more and more aggressively for market share. A consistent profit margin is an economic anomaly. In at least some cases, it indicates that a business provides goods and services its customers can't get elsewhere. To that point, here's a look at Apple's margins over the past few fiscal years ("FY")... Apple's 26% FCF margin in FY 2023 is huge. And it's not a one-year anomaly. Over the past decade, the company's FCF margin has been as high as 30% and as low as 22%. That's a phenomenally high range for any business. So any way we look at it, Apple is a huge cash-gusher... The company's ultra-thick margins tell me it's doing something its customers value. And the consistency tells me that none of Apple's competitors can give customers a similar experience. The third essential financial clue is a strong balance sheet... A strong balance sheet can be defined in two ways. The first is when a company has more cash on hand than debt. The second is when it has more debt than cash but earns enough income to cover its debt-services obligations. Apple owns the first kind of balance sheet... The company has about $162 billion in cash and marketable securities today. And it has roughly $105 billion in debt. So it could pay off all its debt and still have around $57 billion in cash left over. A company that gushes FCF, has consistently thick margins, and holds more cash than debt won't have any financial difficulties any time soon. And today, Apple checks all those boxes. The only question is what Apple can do with all the money it makes. After all, the company's underlying business doesn't require much capital to maintain and grow. That brings us to the fourth essential financial clue – shareholder rewards... Shareholder rewards include both share repurchases and dividends. Share repurchases (or "buybacks") are like indirect, tax-advantaged dividends for investors who keep holding shares. But most companies are mediocre share repurchasers at best. They buy back more stock after it has gone up a lot in value than after it has fallen. In Extreme Value, I've learned not to expect more than that out of most companies. Dividends are taxable cash payments. Long-term investors in a diversified stock portfolio can expect to receive 40% or more of their pretax returns in the form of dividends. Apple buys back shares and pays dividends... The company's share-repurchasing program kicked into gear in 2012. It has consistently bought back shares since then. It has cut its share count about 40% – from more than 26 million shares outstanding in 2012 to less than 16 million shares today. Apple also started paying a dividend in 2012. And it has raised the dividend every year. The current yield is less than 1%. But Apple is roughly a 13-bagger since it started paying dividends. So I'm sure investors who've held on to their shares the whole time are thrilled. The fifth (and final) essential financial clue is consistent return on equity... Again, this is part of my process in Extreme Value. As I tell my subscribers every month... If a business were a bank account, return on equity ("ROE") would be the interest rate you'd earn on all the money you left in it. We also look at return on assets ("ROA") and return on invested capital ("ROIC"). All three metrics help us see how efficiently a company has invested its capital. As you'd expect, Apple crushes it across all three metrics... Less than 40% of S&P 500 companies have an ROE of more than 25%. Apple's ROE is astronomical for a simple reason. The company has reduced its equity through share buybacks. And its already massive earnings have kept growing. To get a truer idea of how much Apple makes when it reinvests in the business, we need to look at the other two metrics. ROA and ROIC each give us a different look at the unlevered returns on capital invested in the business. And they're both huge, double-digit figures. If Apple could reinvest all its excess FCF back into the business, it would be a bargain at $3 trillion. But it can't. Successful businesses eventually get so big that it becomes impossible to create new products and projects that are big enough to move the needle on its earnings. Apple is like most gigantic, cash-gushing businesses. The best these companies can do is use their excess FCF to reward shareholders with share buybacks and dividends. As Apple gets even larger, it'll likely devote even more of its massive FCF to shareholder rewards. The Five Essential Financial Clues help us identify great businesses. And as you've seen today, Apple's five clues are among the very best you'll find. If I would've been smart (or lucky) enough to buy Apple shares many years ago, I'd be very happy. And I probably wouldn't be thinking about selling them today. But that's not what we're talking about in this Digest. Rather, we want to know if Apple is attractive at its current valuation. To do that, we need to think about what Apple's business might be worth relative to its current market valuation... That's why the final section of every Extreme Value issue is titled 'What's It Worth?'... That's where my research partner Mike Barrett and I estimate what we believe the company is worth. And since we're recommending that company, we show you how it's trading far enough below that level to provide you with a good chance of making an outsized return. Our approach differs from most value-oriented investors... Most value-oriented investors will estimate what a business is worth first. Then, they'll consider whether the current share price is attractive relative to that value. They determine the current value by estimating several years of the company's future cash flows. But that method has a big flaw... It requires you to make an accurate prediction of the company's future cash flows. I don't believe a method for making accurate predictions exists. Nobody knows the future. That's why I always tell everyone I can to "prepare, don't predict." So instead, Mike and I turn the process on its head... We don't predict future cash flows to determine current value. Rather, we start with the current market value and figure out what future cash flows we need to plug into our model to arrive at that number. In other words, we begin with the current share price, which is a known quantity. We don't start with a prediction about future cash flows, which is an unknowable quantity. Our process goes a lot deeper than that. But that's the basic idea. We eventually get to a point where we decide if the growth expectations baked into the current share price are too optimistic, too pessimistic, or somewhere in between. When the growth expectations are too pessimistic, we believe the company can earn more revenue and FCF than what the market currently thinks. In turn, that means we believe the company is worth more than its current share price indicates. It's undervalued. From there, Mike and I establish our "intrinsic value" estimate... Our goal is to recommend stocks that are trading at least 25% or 30% below their intrinsic value. That provides us with a margin of safety to account for mistakes or surprises. Our current estimate of Apple's intrinsic value is about $185 per share... As I said earlier, the stock trades for more than $195 per share today. It's not wildly overvalued. But it's still too expensive to be attractive. It would need to fall to around $130 per share to interest Mike and me. That's more than 30% below today's price. Of course, that doesn't mean Apple's stock won't keep going up from here... Value investing isn't about predicting the near-term direction of the stock price. It's about finding longer-term success through undervalued businesses trading at a price that offers a margin of safety and the promise of a good return over at least the next few years. We spend most of our time looking for great cash-gushing businesses that dominate their markets. It doesn't always matter to us whether they're a compelling value right now. If they're not currently trading at an attractive price, that's OK. We'll keep an eye on them. And sooner or later, we'll get a chance to recommend them at a discount to intrinsic value. That's the case with Apple. It's a great business – but it's far from a great value today. We could do this same exercise for the other six stocks in the Magnificent Seven. We'd come to similar conclusions on all of them – except some are even more expensive than Apple. Just imagine if the Magnificent Seven were one giant stock... My colleague and Stansberry's Investment Advisory's new editor Whitney Tilson just did... [In his daily e-letter this week]( Whitney and one of his analysts combined the Magnificent Seven stocks into a hypothetical company. "Mag7" would hold market-leading positions in social media, e-commerce, advertising, electric vehicles, software, and graphics chips. Here's what Whitney and his analyst wrote about Mag7 yesterday... - The stock (the average of the seven) is up a staggering 71% this year. - It has an $11.7 trillion market cap, equal to half of the U.S. GDP (let that sink in). - It trades at 33.1 times current (2023) earnings and 27.5 times forward (2024) earnings. - Last quarter it reported earnings-per-share ("EPS") growth of 51%, the best quarter of this current cycle. - In the current quarter, EPS growth is expected to be 44%. - However, as the year-over-year comparisons get more and more difficult, EPS growth is expected to decelerate... to 30%, 14%, and a mere 8% over the next three quarters. In short, as a single company, the hypothetical Mag7 is priced for high growth that's unlikely to happen. So its stock would likely perform poorly over the near to medium term. That's my point. You see, Mag7 is not a hypothetical company. In reality, it's seven of the world's largest businesses. They're great companies. But they're too expensive to be great buys right now. Fortunately, as investors, we can still find attractive value – even in expensive markets... We just need to know where to look. And we need to go through our process to find it. For example, I just e-mailed the latest issue of Extreme Value to subscribers an hour ago... Mike and I found a company that holds the top spot in most of the markets it serves. It nails all five essential financial clues almost as well as Apple. It's a consistent cash gusher and regularly buys back its shares. It's such a great business that it rarely gets cheap enough for us to recommend. But it finally happened. And the thing is... When stocks of great businesses like this one become cheap, they never stay cheap for long. This stock is already up about 13% since it bottomed at the end of October. It's important to act fast... before this opportunity gets away from us. Now, in fairness to my paying Extreme Value subscribers, I can't reveal the name today. But I can offer an exclusive deal for Digest readers... For a limited time only, you can get started with the lowest entry price we've offered in nearly two years. It's an absurd deal for all the value you'll get. [Click here to learn more](. --------------------------------------------------------------- Recommended Links: [WARNING: Next Week's Fed Meeting]( Investors are looking to next week's final Federal Reserve meeting of the year with high hopes for interest-rate relief. But two Wall Street legends just stepped forward with a dire warning: The Fed's next move could make or break your wealth in the coming weeks. [Here's the No. 1 step they recommend you take with your money before the meeting to prepare](. --------------------------------------------------------------- [Regime Change at the Federal Reserve?]( The Fed just began the rollout of a new technology that will "shake the U.S. financial system." It will likely go down in history as the biggest change to money since Western Union launched "lightning lines" in the early days of the telegraph. [Here's everything you need to know (including three steps to take to profit)](. --------------------------------------------------------------- New 52-week highs (as of 12/7/23): A.O. Smith (AOS), Costco Wholesale (COST), D.R. Horton (DHI), Expedia (EXPE), Fidelity National Financial (FNF), Huntington Ingalls Industries (HII), Ingersoll Rand (IR), Lennar (LEN), PulteGroup (PHM), SentinelOne (S), Sprouts Farmers Market (SFM), Sherwin-Williams (SHW), Stellantis (STLA), and Trane Technologies (TT). The mailbag is quiet today. Whether you take up my offer or not ([and I hope you do]( if you don't already subscribe to Extreme Value), let me know what you think about the Magnificent Seven. As always, you can send your comments and questions to feedback@stansberryresearch.com. Good investing, Dan Ferris Eagle Point, Oregon December 8, 2023 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 1,278.2% Retirement Millionaire Doc MSFT Microsoft 02/10/12 1,172.6% Stansberry's Investment Advisory Porter ADP Automatic Data Processing 10/09/08 835.7% Extreme Value Ferris wstETH Wrapped Staked Ethereum 02/21/20 771.1% Stansberry Innovations Report Wade WRB W.R. Berkley 03/16/12 637.0% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 525.4% Retirement Millionaire Doc HSY Hershey 12/07/07 460.6% Stansberry's Investment Advisory Porter AFG American Financial 10/12/12 403.9% Stansberry's Investment Advisory Porter BTC/USD Bitcoin 01/16/20 380.1% Stansberry Innovations Report Wade PANW Palo Alto Networks 04/16/20 323.3% Stansberry Innovations Report Engel Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 4 Stansberry's Investment Advisory Porter 3 Stansberry Innovations Report Engel/Wade 2 Retirement Millionaire Doc 1 Extreme Value Ferris --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Stock Buy Date Return Publication Analyst wstETH Wrapped Staked Ethereum 12/07/18 1,701.2% Crypto Capital Wade ONE/USD Harmony 12/16/19 1,108.0% Crypto Capital Wade POLYX/USD Polymesh 05/19/20 1,065.5% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 1,048.5% Crypto Capital Wade MATIC/USD Polygon 02/25/21 846.7% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Microsoft^ MSFT 12.74 years 1,185% Retirement Millionaire Doc Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Binance Coin crypto 1.78 years 963% Crypto Capital Wade Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. 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