Apple to California Chrome Prove Don’t Fear Favorites

This past weekend was a tough one to be an A-lister.

Consider the impossible decision to be made about where to practice the A-lister artform of choice: schmoozing. There was the Kentucky Derby, Warren Buffett’s annual hoedown in Omaha and the White House Correspondents’ Association Dinner. The events were separated by enough geography that you’d need pilot Chuck Yeager behind the stick of a Gulfstream to make all of them.

However, anyone able to attend all three -- and even those of us who just read about it all later -- can walk away with a trifecta of wisdom. From the Derby, we learned: Don’t be afraid to bet on the favorite. From Buffett we learned: the Oracle of Omaha’s confidence in U.S. corporate profits is unwavering. And from the Commander in Chief’s selfie roast in D.C.: the geeks from Silicon Valley sure know how to throw a party.

Amit Daryanani of RBC Capital Markets must have been paying attention. He’s out this morning with some encouraging words about the perennial favorite A-lister of the stock market, Apple Inc. (AAPL), and they hit all three boxes of the trifecta. The analyst has raised his 2015 fiscal-year earnings forecast higher by more than $1 a share and pushed his share-price target up by 20 bucks to $645.

After a rough year-and-a-half, Apple has been on a tear lately, rising 13 percent since announcing on April 23 that sales of iPhones surged and the company was taking on debt to boost its dividend and increase its share-buyback plan by $30 billion. (Even though it was sitting on enough cash to literally buy the world a Coke or, heck, even buy the world a Coke, a chili-cheese dog and a Chocolate Covered Strawberries Waffle Bowl Sundae from DQ, which surely would make Buffett happy.)

‘Attractive Entry’

Even after the jump in the stock, Daryanani believes Apple’s price -- at $592.58 as of today’s open -- remains an “attractive entry point.” While he agrees that Apple deserves to trade at a discount to the S&P 500, the analyst said it’s still cheaper than it should be.

In addition to all the cash Apple is returning to shareholders, the Cupertino, California, company can boost earnings by selling low-end smartphones at a 40 percent profit margin, not to mention launching its own television or other major product lines believed to be in the works such as an iWatch, according to Daryanani.

Philosophical Differences

Back to the buyback, which on its own is enough to keep Apple on the A list. Here’s where the philosophies in Omaha and Cupertino are farther apart than California Chrome and Vicar’s in Trouble at the end of the Derby. Buffett is constantly on the prowl for companies to buy with his cash pile. Meanwhile Apple is ready to deploy enough capital to take over any one of almost 90 percent of the companies in the S&P 500, yet it intends to spend all $90 billion on its own stock.

This comes at a time when buybacks are leveling off, and equity offerings are increasing at a rate that may threaten an eventual oversupply of shares.

While a Bloomberg gauge tracking stocks with the biggest buybacks has lagged the S&P 500 this year, over the long run it’s provided stronger returns. The index is up 53 percent since the market’s pre-financial-crisis peak in October 2007, while the S&P 500 is 20 percent higher. For what it’s worth, Buffett’s Berkshire Hathaway Inc. (BRK/A) is up 54 percent since then.

So bottom line, buyback stocks can beat the market over the long haul. Beating Buffett in this horse race is tougher.

To contact the reporter on this story: Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editors responsible for this story: Laura Zelenko at lzelenko@bloomberg.net Jeff Sutherland

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