Apple profit could top estimates in 2010

Fund manager says Apple's earnings could beat estimates as people buy new iPhones and Mac computers.

By TheStreet Staff Jan 5, 2010 12:11PM

TheStreetBy Danielle Kost, TheStreet


Nathan Lamensdorf, manager of the Highland Long/Short Equity Fund (HEOAX), expects Apple (AAPL) to beat analyst estimates this year as consumers buy new iPhones and Mac computers.


The fund, which can take both long and short positions in stocks, has returned 18% during the past year, outperforming 76% of its peers, according to Morningstar (MORN). During the past three years, the fund has gained 4.6% annually, on average, outpacing 91% of competitors. Lamensdorf is interviewed below.


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Lamensdorf: Our philosophy is to buy stocks that are undervalued with improving fundamentals and short stocks that are overvalued with weakening fundamentals. As of the end of November, the Highland Long/Short Equity Fund was about 43% net long on a beta-adjusted basis. Normally, the fund maintains a net long bias of between 20% and 60%.


What is your top stock pick?


Lamensdorf: The largest long position in the fund at the end of November was Apple. We believe that the consensus estimates for fiscal 2010, which ends in September, are too low. We believe Wall Street is underestimating the unit growth of iPhones and Macs, and that investors are also underestimating the amount of gross margin expansion that will occur from the continuing mix shift to the higher margin iPhone.


Based on our estimates, we believe Apple is trading at 12 times fiscal 2010 pro-forma earnings per share (excluding cash on the balance sheet), an attractive price for the leading company in the rapidly expanding smartphone market.


What is your best under-the-radar stock pick?


Lamensdorf: As of Aug. 31, we held a 2.4% position in a company called Hilltop Holdings (HTH). The company trades at a 10% to 15% discount to its tangible book value, and at roughly its net cash value. It’s a holding company that is searching for a potential acquisition in the financial industry.


The company is run by Gerald Ford, who owns over 25% of the company. Ford is a well-known investor and acquirer of banks, who has been investing in this asset class for roughly 30 years, has partnered with Ronald Perelman in the past, and is also a member of the Forbes 400.


Given Ford's experience with distressed assets in this industry, we believe Hilltop will make an attractive acquisition that will be viewed favorably by investors.


In the meantime, given the amount of cash on the balance sheet, downside to the stock should be very limited. The only risk appears to be that the stock could be dead money for some time if Hilltop can't find a suitable acquisition.


What's your favorite sector?


Lamensdorf: Currently, our largest net long exposure is in the technology space. We develop our stock ideas based on bottom-up analysis, not top-down investment themes. We have found attractive investments in the smartphone, wireless towers and data center sectors.


Which sectors or stocks are you avoiding?


Lamensdorf: An area we currently have short exposure in is the telecom equipment space. We believe expenditures on wireline equipment from the telecommunication service companies is going to be weak during the next several quarters, resulting in downward earnings revisions for the equipment suppliers, and a weakening of their stock prices.


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