Dueling Fools: Apple Bull Rebuttal

Rich has it right: He is piling on, and he's missing the Apple (Nasdaq: AAPL  ) for the trees in the process. Let's review, shall we?

Larger risk, lower return
Rich is asking you to take on more risk than I am. Think about it. He's telling you that the so-called safe bets are Intel (Nasdaq: INTC  ) and Motorola (NYSE: MOT  ) , which guarantee nothing. I, on the other hand, am offering you cash money up front and the chance for a 30% annualized return.

But let's not avoid the argument. Rich's case rests on his stalwarts being easy-to-spot bargains. OK, then. Let's follow his suggestion and use the PEG to value these shares, assuming that 1.0 is fair value.

Intel is expected to grow at a 15% rate for the next five years. A 1.0 PEG assumes that the shares would trade equal to the growth rate -- in this case, 15. So, how does Intel look after five years? Have a look:

Metric

2006

2007

2008

2009

2010

Projected EPS

$1.46

$1.68

$1.93

$2.22

$2.55

Multiple

15

15

15

15

15

Fair value

$21.90

$25.20

$28.95

$33.30

$38.25

Nice! Even though Intel isn't yet trading at a bargain -- at least, not according to the PEG ratio -- its growth should support big gains, 77.5% after five years. That's a compound annual growth rate of 12.2%.

Now, how about Motorola? It is expected to grow by 11%, making its fair value multiple -- you guessed it -- 11. That translates to:

Metric

2006

2007

2008

2009

2010

Projected EPS

$1.31

$1.45

$1.61

$1.79

$1.99

Multiple

11

11

11

11

11

Fair value

$14.41

$15.95

$17.71

$19.69

$21.89

Whoops. According to Rich's proposed formula, Motorola still wouldn't reach yesterday's closing price of $22.80 after five years.

Now, let's be honest: This analysis is hardly fair. Growth rates change. By 2010, Motorola could be a faster grower, leading to a higher multiple. But Rich's skewering of Apple is equally oversimplified. Simplified analysis isn't what leads to market-crushing returns.

When wrong is just wrong
I don't mean to pick on Rich. After all, we're usually talking about the same sorts of investments and investing strategies in our stories for Fool.com. But one of us is wrong in this argument, and his last name rhymes with "Sith."

Remember, Rich told you he made the exact same argument a year ago. Look how that turned out.

More to the point, Rich isn't considering the alternative ways investors make money. Options should be in the mix. And if you think derivative investments are for losers, try reading You Can Be a Stock Market Genius, by Joel Greenblatt. He makes a highly compelling case for using long-term call options to make huge amounts of moola. And, yes, before you ask, this is the same guy whom Philip Durell interviewed for Motley Fool Inside Value (accessible with a risk-free trial), whose work Bill Mann has praised, and whose firm, Gotham Capital, has generated 40% annualized returns for at least the past decade. Natch.

Simple is as simple does
Let's wrap this up by lampooning the myth about options. They don't have to be risky or complex. If put options suit you, here's a quick trick to use if you want to figure out a rough return on margin requirement:

Premium x 100 / 25% of the total value of 100 shares of the underlying stock.

Let's say you sell one contract for the March $30 puts of ACME Rockets (TICKER: BOOM). You earn a premium of $1 per share, and the stock currently trades for $35. Your projected return is:

$1 x 100 ($100) / $35 x 100 x .25 ($875), or 11.4%.

What could be simpler, or more profitable? Answer: Nothing Rich has offered you. Case closed.

Wait! You're not done. This is just a quarter of the Duel! Don't miss the bull and bear openings, as well as the bearish rebuttal. Even when you're done, you're still not done. You canvoteand let us know who you think won this Duel.

Fool contributorTim Beyerscounts not buying Apple as one of his greatest investing mistakes. He still doesn't own shares in the Mac maker, nor in any of the other companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.


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