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Mail Bag: Pacific Insight Electronics (PIH) & Apple (AAPL)

Marsha writes,

I follow commentary by a few money managers like Bruce Campbell, Paul Harris and Michael Irwin trying to pick up tips on value stocks to buy. What are your thoughts on Pacific Insight and Apple?  Are they good value stocks or should I be looking elsewhere?

First thanks for the questions!

For disclosure I own neither directly and never have.  That’s not a reflection of their quality or prospects as investments, but rather where and how I have decided to allocate my capital in recent years.  For my US and International equity exposure in the past I owned a large number of dividend paying stocks, which has transitioned in the past 18 months to a select group of individual stocks and a larger allocation to VOO (S&P500 ETF).

While I think it’s great for a novice investor to read as much as they can, including following what other smart people do, I’m a firm believer that you should study the reasons, criteria and mistakes they make rather than the individual stocks they invest in. This was a pitfall for me 20 years ago when I didn’t understand investments as much as I should have and tried to follow in the steps of much more successful investors.  I did have successes and failures, but I would have been much better to study their actions and mistakes first.

 

Pacific Insight Electronics (PIH)

I did read Jonathan Ratner’s of the Financial Post article, From defence to offence: Growth stocks gaining traction for this money manager (September 6 2016), including Bruce Campbell’s comments in that article about Pacific Insight Electronics (PIH).  While the company does have a good balance sheet, increasing earnings, strong gross margins and an attractive price to earnings ratio (P/E) there are risks.

Pacific Insight provides LED lighting, control modules and wire harness components to customers such as Ford, Caterpillar, Daimler, Tesla and Harley Davidson. They are a small niche manufacturer and will be more economically sensitive than an investor might expect.  From an initial glance I can’t identify a moat they currently posses and 45% of their revenues come from their largest four clients.  With Unifor expecting to negotiate hard with Ford, General Motors and Fiat Chrysler there is significant risk that manufacturing disruptions could impose a massive risk to Pacific Insight.  This would be a company I would encourage an investor to develop a proper situational analysis on including a SWOT, PEST, Competitive Analysis and Financial/Cash Flow Analysis.  It is important to know what you’re buying, why and to have an exit strategy (positive or negative)

 

Apple (AAPL)

Apple I would have no problem holding myself at the right valuation, but long-term I’ve committed more capital to other investments and I’m happy with my exposure to Apple through my S&P500 ETF. Apple has billions in cash, pays an attractive dividend, sells at a very reasonable price to earnings ratio, has a mature product line and international sales.  The problem I perceive for Apple is market saturation, too much cash to know what to do with, taxation internationally and their identity.

I personally love my MacBook, iPad, iPhone and the Mac operating systems. I have had no issues paying for the quality I’ve enjoyed, but that doesn’t mean others do.  Apple has never strived to be accessible to all consumers, but the question arises, “Where do they go next?”  Emerging markets and their developing middle class offer growth, but this isn’t in the same category as toothbrushes, toothpaste and personal care products for PG, CL or JNJ.  Apple to me is a much more mature company than most retail investors realize and that’s represented now in the P/E ratio.

That’s not a bad thing; higher dividends, share buy backs and acquisition will ensue. The major problem I perceive for Apple is who they will be and what to do with all their cash.  Acquisitions are nice, but they have to add meaningful value and return on investment (ROI) which when you have that much cash is hard to do.  Far too often you see a company over pay for an acquisition, the ROI stinks and they overpaid to keep it out of a competitors hands which would have had a bad ROI too.

I think Apple fits very similar with Pacific Insight in;

  • Know what you’re buying
  • Have clear expectations of how it will perform
  • Perform the appropriate analysis

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