A Tale of Two Companies

Everything you are about to read is factual. Every word is undisputed, not subject to interpretation, and grounded in black-and-white data of recent history.

I’m going to tell you a story of two companies. All figures are true, the only things I’m disguising are the names of the companies.

A Tale of Two Companies

Company A, to put it lightly, is struggling. Over the last three years, this company’s stock has risen just 20%–paltry returns against an S&P 500 that has had a total return of over 60% in the same period. The prevailing consensus is that the vision of this company is dead–ever since the company’s CEO decided to go to a “advising” role back in 2011.

Earnings, as you can imagine, are equally underwhelming. EPS is expected to grow just over 7% in the next 12 months. This sounds reasonable, until you realize that this company has a penchant for share buybacks, which have reduced the overall share count by over 10% in the past two years–and which have artificially “juiced” EPS.

What was once a seemingly world-by-storm innovator, this company has been relegated to primarily “tweaking” legacy products in an effort to tread water in hardware industry where the “race to zero” ultimately causes profit erosion to the point of total business marginalization and yielding to Chinese price competitiveness.

This company had long been accused of “sandbagging”–so roundly beating management’s profit guidance that the guidance was entirely dismissed by the street. Nowadays, as if to add insult to injury, the current CEO has turned a complete ‘180’, and is now a serial “overpromiser,” constantly alluding to a robust product pipeline that never seems to materialize.

Finally, in an age where even Google has seen the light and started controlling costs, Company A is still spending cash like it’s going out of style–with R&D expenses more than doubling over the last two-and-a-half years.

Things are rough, the dividend is paltry and seemingly just there to appease investors, and many are calling for the CEO’s head. Goldman Sachs removed Company A from its revered Conviction Buy List back in 2013, and it has been left for dead ever since. Many tend to agree with Goldman that Company A, as you might guess by now, is an overwhelming SELL.

Company B is turning heads for all the reasons that Company A is not. Company B, in no ambiguous terms, is killing it. Earnings per share are up a mind-blowing 322% over the past five years. Their gross margins are the best in their sector, and those margins have continued trending further upward for the past two years.

The company isn’t stingy to its shareholders, either. Company B instituted a dividend just two years ago, but has increased it 11% per year since. The market has rewarded this company with strong stock gains as well, with shares up over 110% in the last 24 months! 

You wouldn’t fault them for taking the foot off the gas pedal, but Company B isn’t resting on their laurels. With the death of their founder a few years ago, the company seemed to redouble on their commitment to delivering the best products in the world. And so far, they’ve been good to their word. Just three months ago, the company released an entirely new product line, which has been received so well by the masses, that it is the company’s most successful product launch in its history. Of course, this isn’t all they’ve done lately. In the most recent quarter (April-June 2015), the company announced that sales in China that grew 112% yoy, high-margin services revenue grew 12%, and ‘other’ revenue (which is a catch-all for smaller product lines) grew at 49% yoy.

Without a doubt, this company is firing on all cylinders and the analysts know it. In just the last few months, Oppenheimer, Societe Generale, Barclays and Nomura have all either upgraded or initiated coverage of Company B with Outperform, Buy, or Overweight ratings. Even the big indices have caught on, with Company B being added to the popular Dow Jones Industrial Average earlier this spring.

Company B is as close as you can get to a unanimous BUY. Back up the truck!

The Big Reveal

You’re probably asking, “Tell me Eric!!! What are these companies?! I need to short Company A and invest the kid’s college fund in Company B! For the love of God, tell me!!!”

Okay, here goes…

Company A….is Apple.

Yep, pretty unbelievable. Better go out and find some shares to short.

Company B…is also Apple.

See what I did there? Six red apples in one hand, half a dozen greens in the other.

The Bottom Line

I’m writing this today partly out of disgust. Yesterday I read this article from Forbes and it just killed me. It was a bearish article on Apple. However, nothing the author said was a lie–it was all true. The problem though, was that facts, figures and statements were so selective, so cherry-picked, and so taken-out-of-context, that it got me thinking…”this is a total misrepresentation!”

Apple is my largest holding. The author of this article, per his disclosure, is long both Apple stock and Apple puts–so he benefits near-term in price declines but long-term in price advances. The point of my post, though, is to show you just how easy it is to misrepresent the same story to support whatever thesis you want to have. There are literally facts and figures to support anything. If you want to ban guns, then you can say active shooter incidents in 2013 numbered 17 compared to just one in 2000. Conversely, if you support guns, you can also say that gun deaths per 100,000 Americans have fallen by half since the early ’90’s.

In the end, this is all confirmation bias, which is the tendency to find and interpret data in whatever way supports our preconceived ideas. If I hate Apple stock, I can write about it as I did for Company A. If I love Apple, then it’s Company B. I’m right in both cases, but obviously very selective in what I choose to say.

For the record, I love Apple. It’s my largest holding for a reason, which I cover a bit more here. But, the point of this post isn’t to push Apple stock. It’s to reinforce the idea of due diligence. Don’t believe anything you read, because everyone has an agenda (except for good old Retire29).

Thanks for reading Retire29, and please share this post with your friends and family if you liked it! Or, better yet, subscribe and get these in your inbox a couple times per week (no spam).

Eric