.png)
In the 1st part, I defined the basic framework of the portfolio which included the strategy, time horizon, investment universe and selected a benchmark (MSCI ACWI Investible Market Index). The US having the largest regional weight on the index, today I am going to evaluate the US Megacaps (Apple, Amazon, Google and Microsoft) and consider if I can have all or any of these in my portfolio.
Company Financials:
Among the 4 stocks, the market cap of Microsoft is about 10 times its annual revenue while Apple trades at approx 6.5 times its annual revenue. In terms of revenue multiples, Amazon and Google are more attractive. Between the two however, Google is the one that has delivered a net income to its shareholders in the last twelve months. Amazon has posted a loss in this period.
In efficiency and leverage risk, Apple has two times the debt on its book than its equity. It is because of the size of its debt that Apple's return on equity shows an impressive number of 127% since ROA does not account for debt. ROCE is a much better indicator since it considers net assets. In terms of debt on books, Google is the most attractive among the four with only 11% debt / equity ratio. This is important in a rising interest rate scenario. With the FOMC raising interest rates at nearly every meeting, the interest expense is only likely to go up.
As expected, in terms of PE ratio, Microsoft is the most expensive followed by Apple. Again when PEG ratio is considered, Google has fallen the least compared to Apple and Microsoft.
An important question that needs to be answered here is about risk tolerance. These stocks have a 1 year volatility of 35 to 40%, even if a stock is attractive, am I willing to bear the risk? It could well be that these stocks could be lower by 35 to 40% in the next one year.
When considering trends in Revenue Growth, EBITDA Margins, Inventory, Capex, interest expense and cash from operations - Google is the stock I would like to have on my portfolio while I put Apple, Amazon and Microsoft on a watchlist to come back to at a later time. I must also add that while Amazon may have posted a loss, it may be turning a corner on lower growth and higher expenses. I will need to get back to this after the company announces its Q1 2023 results.
On a DCF Valuation, the most upside in the stock to its fair value lies with Google with a 48% upside followed by Amazon (21% upside) and Microsoft (14%) upside. Apple is already trading above its fair value.
At the end of this evaluation, I am going to buy Google in my portfolio and put Apple, Amazon and Microsoft on a watch-list. In the next part, I am going to evaluate stocks in the Automation & Engineering sector.
Watch the videos of this series on our social media pages. Please subscribe, follow, like!
Comments