Opportunity to take a Bite of Apple

The correction in AAPL from $233($1.1T market cap) to $145 ($690B market cap) has brought AAPL shares to a very reasonable valuation. Excluding the net cash position shares trade for 12 times forward earnings for a company that is the #1 in its industry and has no immediate risk of disruption.

The slowdown in sales and earnings due to impacts in China and risk due to US China trade war are now priced into the stock. If AAPL can show incremental innovation and show some growth in services and hold its ground in iPhone and iWatch sales we can expect a $200 share price and $900B valuation. Any innovation would imply additional upside.

Now Is A Time To Buy Stocks

Now Is A Time To Buy Stocks where there is fear and uncertainty in the market. This opportunity where valuations are down across the board including high growth stocks and value stocks has valuations for S&P at 14 times forward earnings. It is quite possible that valuations can get further attractive over the next while into 1Q2019. However timing the bottom is a fools errand and dollar cost averaging down over the next few months is a reasonable approach. The previous such market dislocations including Jan 2016 (Commodity Cycle Bottom), Jul 2015 (Chinese Market Crash), Jun 2012 (Euro Crisis), Sep 2013 (Emerging Market Bond Crisis due to Perceived Fed Rate Increases) Aug-Oct 2011 (US Govt Shutdown etc.) have all been good opportunities looking back.

Below are some of the geo-political and macro economic factors at play in the market over the next few months. It is good to remember that the works is uncertain all the time and investors focus on it at some times while they ignore it most other times.

Market Outlook For Next 6 Months

I believe a confluence of political and macro economic issues will weigh on the stock market over the next few months. These will be compounded by swings in investor psychology which can lead to sharp sell offs due to herd like mentality. 

1. China US Economic Warfare 

China and US are engaged in an economic and geopolitical warfare that will last a long time and is inevitable. There may be a truce but this is a 20 year battle. China has got economically strong and will overtake US economy in next 10+ years due to their faster growth rate and higher population which is moving from semi skilled to highly skilled economy focused on services and higher end manufacturing. This economic might will be translated into military spending and enable it to challenge US as the #1 superpower. China has also been running a smart operation to steal US and Global Intellectual Property. US wants to remain #1 so they will challenge and try to prevent rise of China any further. US and China will target each other’s economy and companies and this will create winners and losers in industries and specific companies. Some US manufacturing and service and tech companies will benefit while other agriculture companies and some companies exposed to Chinese customers will be negatively impacted. 

Companies may reduce new investments and consumer sentiment and investor sentiment may be affected. Strong employment in US and rising wages may counter this effect. 

Brexit Mess and Anti Immigrant Right Wing Movement in Europe

UK is mired in a mess with Brexit with a lose lose options all around and a deeply divided country. EU countries need to cut down immigration or else there will be a huge backlash as in US from the voters. The uncertainty and trade friction caused by Brexit will reduce consumer sentiment and business investment in the next 2 years and can effect the economy. With lower sentiment house prices and demand for luxury goods and big ticket items like cars may go own in near term. 

US Political IssuesI believe Trump administration may run into issues with legal matters if they conspired with Russia to tilt the 2016 US presidential election. I think this will be ongoing and may or may of resolve before 2020 elections. Regardless of outcome I don’t think this will impact the US economy in the long term as the lower taxes and reduced regulation and capitalist system will favor investors and company profits.

Trend Against Large Cap Tech Monopolies Sentiment has turned negative against large cap tech monopolies like AMZN, GOOGL, FB etc in US and Europe and globally. Europe will likely increase regulation and also enforce minimum taxes on revenue. However the monopoly and market position of tech giants is so strong that their business juggernaut will continue to move forward. Growth rates of earnings may slow and hence the P/E multiples may continue to contract. 
 

Interest Rates & Monetary Policy

Possibility of accelerated interest rate increases in US were a risk. However the intervention of Trump and other factors now seem to imply the US Fed won’t raise rates much from this point.

This could be a positive for emerging market economies like Brazil and India. Brazil has elected a new pro market leader after 15 years so investment sentiment and returns are expected to be good and BRL weakening over last few years has made the agriculture and other industries very competitive globally. In India outcome of April 2019 elections may have a major impact on international investor sentiment.

Facebook (FB) at $130 Trading at 17 Times Forward Earnings.

Facebook (FB) at $130 is trading  at a very attractive entry point at 17 Times Forward Earnings.
FB is valued at ~$360B excluding excess cash which is a very attractive price for a dominant company in its industry of Social Networking and Advertising. FB has strong products including FaceBook, Instagram, Whatsapp, Messenger. Instagram and Whatsapp will  be monetized over the coming years. FB also has 19% market share in the fast growing online advertising space with GOOGL having 37% share and AMZN catching up with 5% market share.

Even assuming reduced margins going forward for FB due to increased spending for security and impact of regulations for a company that can grow revenue and earnings 20%+ for next 5+ years $130 and $360B excluding cash is an attractive price. Any additional innovation by FB can add additional upside. Projected FB target price 3 to 5 years out from Oct 2018 is $250 to $350.

BAM to Take Advantage of Dip in BPY To Increase Ownership

Shares of Brookfield Property Partners LP (BPY) have been weak to concerns about a soft 3Q2018 and investors shying away due to concerns about the high leverage, extermal management, rising interest rates and pessimism about propects for the Retail (GGP) portion of the business.

Brookfield Asset Management (BAM) is likely to take advantage of this dip in BPY and could increase its ownership stake in BPY from 53% to 60% or more over the course of next few months.

It is yet to be seen if BAM 's plan for re positioning  and redevelopment of GGP assets will be successful or not. There is also some risk in terms of whether BAM and BPY can sell select GGP assets at good valuation over next 12 to 24 months to deleverage the balance sheet as planned.

BAM will need to execute flawlessly over next year to strengthen BPY balance sheet. Brexit related pessimism (BPY has significant UK assets including 50% ownership in Canary Wharf and assets in Central London) and fear of rising interest rates and BPY having 37% of debt exposed to variable rate mortgages are a factor to consider.

Time will tell but odds are in favor of BAM succeeding in its plans for BPY and realizing unit price of $30 over next 3 years.

FB at $150 - An Attractive Entry at 20 Times Forward Earnings

Facebook (FB) at $150 is trading  at a very attractive entry point at 20 Times Forward Earnings.
FB is valued at ~$400B excluding excess cash which is a very attractive price for a dominant company in its industry of Social Networking and Advertising. FB has strong products including FaceBook, Instagram, Whatsapp, Messenger. Instagram and Whatsapp will  be monetized over the coming years. FB also has 19% market share in the fast growing online advertising space with GOOGL having 37% share and AMZN catching up with 5% market share.

Even assuming reduced margins going forward for FB due to increased spending for security and impact of regulations for a company that can grow revenue and earnings 20%+ for next 5+ years $150 and $400B excluding cash is an attractive price. Any additional innovation by FB can add additional upside. Projected FB target price 3 to 5 years out from Oct 2018 is $250 to $350.

Amazon Continues to Innovate with Alexa and Echo Product Updates

Amazon (AMZN) continues to Innovate with Alexa and Echo Product Updates.
Products and Updates released include:

1. Echo Dot
2. Echo Plus
3. Echo Show
4. Microwave Echo/Alexa Enabled
5. Echo Auto
6. Smart Plug Echo/Alexa Enabled
7. Wall Clock Echo/Alexa Enabled
8. Alexa Guard 
9. Ring Security Cameras 
10. Fire TV Recast 
11. New Alexa capabilities - Hunches 
12. Echo Link Amp and Echo Link Audio Equipment

With a growing moat and expanding customer engagement with Amazon Prime, Video, Advertising, AWS & Cloud Services, Alexa, Whole Foods etc. an expanded addressable market of $10+ Trillion makes a path of eventual AMZN Equity valuation of $2T eventually feasible. AMZN current trades at $1950 per share with a market cap of ~$950B.

AMZN also could be looking to open 3000 stores in US over next 5 years with its revolutionary store concept and this could help with better engagement with users and expansion into additional end markets including Medical, Food Services, Travel etc.

Brookfield Asset Management Primed for Growth

Brookfield Asset Management (BAM) had its Annual Investor Day Presentation presentation on 26th September 2018. Aseets Under Management (AUM) reached $300+B for the first time in its history with Fee Paying Assets Under Manement (FP AUM) trending to ~$130B.


With operations in 30+ countries and a growing investment footprint across Real Estate, Infrastructure and Private Equity the company is at the cusp of explosive growth over the next 5 years. BAM raised $20B in the last 12 months and invested a staggering $33B in the last 12 months. The quality of  assets purchased mostly in US, Canada, Brazil, Germany, India demonstrate that value investing is possible even when the Equity and Debt Capital Markets are at a peak. The distinguishing size of BAM and its large scale capital, operating expertise and the ability to make synergistic acquisitions and management with ownership mentality and long term focus are key  competitive advantages that make this possible.

Some of the high quality investments of BAM over the last 12-24 months are as below:

1. GGP Inc. ($15B Equity)
2. Westinhouse Electric ($1B Equity, $4B Enterprise Value)
3. Forest City Realty ($6.5B Equity, $11B Enterprise Value)
4. Enbridge Natural Gas Gathering Pipelines ($3.3B Equity)
5. Enercare ($3.3B Equity)
6. Asciano Ports and Logistics ($3.4B Equity, 50% ownership and select assets 100%)
7. NTS Brazil Natural Gas Pipeline ($5.2B Equity overall, 90% ownership)
8. BRK Ambiental Brazil Water Services Utility ($0.9B Equity for 70% ownership).
9. Potsdamer Platz in Berlin (Price Not Disclosed)
10. Powai Mumbai India Office Park ($1B Equity)
11. TerraForm Power and TerraForm Global ($1.5B Equity)
12. Isagen Colombia Hydro Assets ($2.2B Equity), Gas Natural Columbia Transmission Assets ($1.2B Equity) 

BAM is Primed for Growth over the next 5 years and price could reach from $42 recent price to a target price of 80 to $100 per ($80B to $100B Market Capital) if estimated growth in AUM, Fees and Growth in Invested Capital pans out.