The company continues to defy expectations on the profit front, and after crushing numbers for the holiday quarter, analysts now expect $42 of earnings per share in fiscal 2012, up from just a $35 consensus figure a few weeks ago. In addition, cash continues to build on the balance sheet, reaching $98 billion at year-end, up 50% from a year ago.

An interesting thing has happened with the stock, though. As management has continued to hoard cash unnecessarily, and the company reaches a size that many believe makes it prone to a stumble in the not-too-distant future (investors expect this $100 billion a year company to grow 45% this year), the P/E ratio of the stock has tumbled. In fact, Apple now trades at a discount to the S&P 500 index on a trailing earnings basis (13x vs 14x). Looking out at 2012 profit expectations, the gap widens further as Apple’s P/E drops to about 11x. And that does not even include the $100 per share of cash Apple is sitting on.

As far as the cash goes, Apple is essentially getting no credit for it in the public market. The stock trades for about 8.7 times 2012 earnings ex-cash, which tells me that if they did pay a huge one-time special dividend ($50 per share would be my recommendation, not that anyone has come asking), the stock would likely not drop as would be the case in most similar instances (doing so would mean the discount to the market would get even larger). This is one of the reasons I am not selling Apple shares yet.

In terms of earnings, it appears that the days of Apple commanding a premium in the market are behind us. Even with a ridiculously positive earnings surprise for the fourth quarter, Apple stock popped just 6%. That compares with an earnings beat of 35% and an upward revision for 2012 profits of some 20%. Given Apple’s size, extreme bullish sentiment, and awful capital allocation practices, investors are not going to give them a rich valuation, which limits upside to a certain degree by taking multiple expansion off the table.

Given these new parameters, how can we value the darn thing? First, I will assume they do not change their cash management strategy this year (a painful thought). Since I do not see the market giving Apple more than a market multiple, I would multiply $42 in earnings for fiscal 2012 by 13 (market P/E) and that gets us to $546 per share. There are plenty of Wall Street analysts with year-end price targets that have a six in front of them, but I just do not see that happening. So, my best case guess is 17-18% upside from here, and maybe a bit more if Tim Cook eases up the company’s death grip on their cash. As a result, I am not a seller yet, even though the stock reached my $450 target price from last year.

Full Disclosure: Long shares of Apple at the time of writing, but positions may change at any time.

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How can we value the shares given that business has not been great and the new CEO could really turn things around? It is not an easy task, but since Johnson turned Target into a hip retailer more than a decade ago, that seems like a good place to start. Let’s assume Johnson can get JCP’s margins all the way up to those of Target. That is a hefty assumption (and one that even if accomplished will likely take years, not months or quarters) but using optimistic projections can really help investors figure out what the upside could be. In 2010 Target earned 11% cash flow margins, versus just 7% at JCP, so Johnson clearly has some room to boost JCP’s profitability. However, that upside is largely negated by an expensive stock price after a 20% gain so far in 2012. JCP shares trade at 8 times trailing cash flow, versus just 7 times for Target.

Target currently fetches an enterprise value-to-revenue ratio of 0.75 times. If we assume JCP can match TGT’s profit margins (again, a very optimistic assumption) they too would fetch the same price. We can use EV-to-sales here because with the same level of profitability, sales and earnings multiples are interchangeable. Giving JCP a 0.75 EV-to-sales multiple puts the equity value at about $10.75 billion (excluding $2 billion in net debt), versus $9 billion today. The stock price at that level would be right around $50 per share.

So if Ron Johnson can turn JCP into a profit machine like Target, and we assume the stocks trade at similar valuations to reflect their strong businesses, JCP stock could rise another 20% or so, from $42 to $50 per share. It could be worse, of course, but with those numbers it is hardly an overwhelming attractive investment at current prices. That gain would be several years away, and assume Ron Johnson can live up to the hype he earned at Target and Apple, even though JCP is clearly in a more challenging competitive position.

As a result, I am steering clear of the soaring stock even though the TV commercials are great and the odds are good that Johnson will greatly improve the store experience over time.

Full Disclosure: No position in JCP at the time of writing, but positions may change at any time

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I have been making this argument for a while, and holding the stock has not been fun while it has been treading water far below tangible book, but even with a cyclical industry like investment banking, GS stock should not be at these levels. It is really hard to see how the company would face a scenario where book value dropped 20% from here (which is essentially what investors are fearing when the stock trades at $98). If the sub-prime mortgage meltdown barely hit book value at Goldman, I don’t see the European debt crisis doing far more damage. And even if the industry does not turn around as quickly as it has in past cycles, book value will likely go sideways or slightly higher, as we saw in 2011.

For investors to justify the idea that large, well-positioned, and profitable financial institutions should be trading far below tangible book value per share (and GS is far from the only one), one of two scenarios would need to play out. First, the companies would have to have huge unrealized losses already sitting on their books, which when realized would crush book value and wipe out the discount on the shares. Unlikely. Second, the business model would have to break down long term, rendering the firms unprofitable, which would result in a slow degradation of book value (again, narrowing the valuation gap to the downside). Again, unlikely.

Profit margins will likely drop permanently due to the Volcker Rule (no prop trading), but they should stay in positive territory (Goldman’s ROE in 2011 was 6%). That should result in lower price-to-book valuations for these banks versus prior cycles, but not below one. As a result, I think GS and their strong peers should trade for at least tangible book value, which means about 25% upside from here.

Full Disclosure: Long Goldman Sachs at the time of writing, but positions may change at any time

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Simpson, long considered to be a possible Buffett successor despite only a small age difference, retired from Berkshire in 2010 but remains active as a director on three public company boards of directors. Chesapeake is one of the three and the latest. Interestingly, in recent months Simpson has sunk more than $5 million of his own money into Chesapeake stock, at prices in the high 20′s. This is a rare move for Simpson, who typically does not make moves in the public eye like this. As a director though, he must update his holdings in Chesapeake whenever changes are made. I find this move especially telling because in the case of the other two public companies he is involved with, he has largely been given stock options in return for his service, whereas direct open market purchases are rare for him. Often times new directors make small investments (say, a few thousand shares) to show public support, but Simpson has made two separate purchases of 100,000 shares each, for more than $5 million in total.

Now, some may point out that Simpson is worth a heck of a lot of money, so $5 million to him may be peanuts relatively speaking. And I can’t argue that point, but given Simpson’s investment savvy, coupled with the fact that he has not done this with the other companies he serves, I think it is worth noting and is likely due to his belief that the stock is actually quite attractive.

CHK shares, as mentioned previously, are down a lot in recent weeks, as natural gas prices have sunk to $3 and the company continues to spend more on exploration and production than it brings in (to the detriment of equity holders), but it is now even cheaper than it has been previously. And given that Icahn was very successful with his first investment in CHK, I would not be surprised if he got back in, now that the stock price has given back all of the gains he booked, and more. Chesapeake investors, myself included, have been frustrated a lot in recent years, but these recent buys by Lou Simpson strengthen the case that giving up now might be a mistake.

Full Disclosure: Long shares of CHK at the time of writing, but positions may change at any time

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