How to pitch the bear case for Apple’s share price — updated

This email that came in over the transom to Apple 3.0 from a PR agency (posted with permission):

UPDATE: Misunderstanding. Permission withdrawn.

In the PR letter’s place I offer excerpts from a note sent to Distillate Capital clients under the title “Why we owned — and sold Apple” by Thomas Cole, the agency’s client:

As Figure 8 depicts, both Apple and Microsoft offered remarkably cheap valuations around 2012, with free cash to enterprise value yields around 18% compared to just under 6% for the market overall. Stated differently, with an enterprise value yield of nearly 20%, the implicit math suggests all of Apple and Microsoft’s shares and debt could have been retired in just over 5 years.

In both cases, the shares went from the 100th percentile, or absolute cheapest stocks in the S&P 500 Index, to being among the more expensive most recently. (It is worth acknowledging that since Apple and Microsoft are facing fewer fundamental headwinds in the current environment than many peers in the S&P 500 Index, their current rankings may be getting somewhat flattered.)

Lastly, conversations about growth and value often miss that an inexpensive free cash flow valuation itself can counterintuitively be a driver of growth, as it was for Apple. While forecasts for rolling next twelve month free cash flows increased 50% for Apple from the start of 2015 through Q3 2020, the share count reduction amplified the per share impact of this growth by another 32%! And the magnitude of the share count reduction was driven by just how inexpensive the stock price was in relation to free cash flow. Figure 10 shows Apple’s free cash flow yield versus year-over-year changes in its share count and displays how the excess cash enabled share count reduction.

In relation to Distillate’s U.S. FSV Strategy, Apple and Microsoft were among the strategy’s largest holdings until valuations became more expensive and each stock was sold.