The Market Does Not Understand Apple

Simplicity is the ultimate sophistication when it comes to investing. Buying a high-quality business with attractive valuation levels can be a powerful strategy to generate market-beating returns over the long term.

Apple (AAPL) stock looks like a particularly compelling investment when considering the company's financial quality and valuation levels together. This is arguably because the market is underestimating Apple's ability to generate consistent profitability and revenue growth due to its unique competitive advantages and fundamental qualities.

Quality And Value By the Numbers

Quality and value drive investment returns, and investors can invest in companies with strong quantitative indicators in terms of those two variables to obtain market-beating returns over the long term.

The following quantitative system is based on a ranking algorithm focused on a combination of financial quality and valuation. Each stock in the investable universe receives a quantitative ranking, which is an average of these two factors: financial quality and valuation.

The financial quality factor is a combination of gross margin, free cash flow margin, return on investment, return on equity, and long-term growth expectations. A stock is ultimately a share in an ownership of a business, so shares in companies with superior profitability metrics and above-average growth expectations create more profits for investors over the long term.

The value component of the ranking system includes valuation ratios such as forward price to earnings, price to earnings growth, price to free cash flow, and enterprise value to EBITDA. The lower the entry price in an investment, the higher the potential returns for investors on a forward-looking basis, especially when the business is fundamentally solid.

Leaving all the mathematical considerations aside, the main rationale behind the quantitative system is actually quite simple and easy to understand. We want to buy high-quality companies for a conveniently low price, the system is basically using multiple metrics and indicators to find that kind of companies.

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Disclosure: I am/we are long AAPL.

Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any ...

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