You're Crazy to Be Selling Apple

Come Oct. 17, I will purchase shares of Apple (Nasdaq: AAPL  ) .

Why not sooner, or today, when a global sell-off has the iEmpire trading down by more than 4%? The Motley Fool's disclosure policy requires that I wait 10 days to buy stock in a company I've written about.

And yet the delay doesn't bother me. Barring an announcement from CEO Steve Jobs that the iEmpire has built a gold-smelting plant in outer Freedonia to hedge against exposure to the U.S. dollar and outfit a new limited-edition series of gold-plated MacBooks -- first customers: Donald Trump and Kanye West -- I expect the irrational selling to continue for weeks, perhaps months.

You call this Apple rotten?
Investors have a recent history of ignoring good news. Two of the more notable happenings from the past week:

1.    Copyright regulators handed Apple an important victory in its fight to keep iTunes tracks priced at $0.99 each.

2.    The rising Mac market share eats into Microsoft's (Nasdaq: MSFT  ) lead.

To be fair, analyst downgrades have investors skittish, but, if you're a long-termer like me, Apple's valuation has rarely looked better. Doing the math, Mr. Market valued the iEmpire's earnings power -- its market cap after subtracting cash on hand -- at just $74.69 per share, or 14.6 times trailing earnings, as of Monday's close.

For perspective, here's a look at companies that trade for similar multiples but lack Apple's extraordinary cash position:

Company

Trailing P/E

Expected 5-Year Growth Rate

DreamWorks Animation (NYSE: DWA  )

13.04

9.92%

Pfizer (NYSE: PFE  )

14.24

3.85%

Affiliated Computer Services (NYSE: ACS  )

14.04

12.71%

Sources: Motley Fool CAPS, Yahoo! Finance as of Oct. 6, 2008.

Apple's peers don't do much better:

Company

Trailing P/E

Expected 5-Year Growth Rate

Dell (Nasdaq: DELL  )

11.11

11.68%

Hewlett-Packard (NYSE: HPQ  )

12.69

12.8%

Sources: Motley Fool CAPS, Yahoo! Finance.

Let's complete the equation. After accounting for cash, Dell fetches 8.4 times earnings. Hewlett-Packard gets 12.1 times its per-share income. And Apple gets ... 14.6, a 21% premium to what HP commands? How is that fair?

Answer: It isn't. High growers deserve high multiples. Apple isn't getting one now, but I'm betting a portion of my retirement savings that, over the long haul, it will. Do you agree? Disagree? Use the comments box below to share your view.

For related Foolishness:

Fool contributor Tim Beyers watched the cone of silence descend over him as he wrote this article. An airtight disclosure policy will do that.

Tim hunts for the best of tech as a member of the Motley Fool Rule Breakers team. Here's how to try this market-beating service free for 30 days. Get access to all of Tim's Foolish writings here.

Apple and DreamWorks Animation are Stock Advisor selections. Dell, Pfizer, and Microsoft are Inside Value picks. Pfizer is also an Income Investor recommendation. The Motley Fool's disclosure policy likes Pfizer but doesn't need Viagra.


Read/Post Comments (4) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2008, at 3:42 PM, jimardell wrote:

    All you need to do is go to the local Apple Store and you can tell that this stock has no where to go but up. The mall can be deserted, but there will be people in that store.

  • Report this Comment On October 07, 2008, at 5:41 PM, wciu wrote:

    Is Apple cheap right now? I don't think so.

    Would I sell it now? Nope.

    Although it has fallen a lot, it doesn't mean that it is cheap. I think the valuation is now more or less reasonable, but not irrationally low.

    Saying that high grower stocks deserves high multiples is dangerous . High multiples are usually results of irrational exuberance not because of real returns, and we had a lot of that in the last few years. It's about time for a reality check.

    If you follow Buffett's advice, then before you buy, you have to ask yourself: Is Apple a great company? Can any fool run it and be successful? If you have unlimited resources, can you go up against Apple and win? And, more importantly, can I get a better deal elsewhere?

    Honestly, I am not really sure about some of the answers to those questions. So I wouldn't buy at current prices... but I wouldn't sell either.

  • Report this Comment On October 07, 2008, at 6:23 PM, MacMcFarland wrote:

    Given that I expect the economy to be in a tail spin for years, not months, a luxury dealer like Apple does not appeal to me. "Expected 5-year growth rate" begs the question, Expected by whom?

    Under these circumstances, I'll take PFE, 3.85% "expected" growth rate and all, over Apple, on the theory that I would rather own a company in the "your money or your life" business than one in the "we'll make your life more fun and/or prestigious" business.

    And Pfizer has no small hoard of cash itself.

  • Report this Comment On October 21, 2008, at 8:44 PM, temtbv wrote:

    Your Right On! THe Majority as Always is BLIND to what's happening at AAPL. I wish my 3 college students had some money to invest in "SURE" thing long term stuff like Apple, GE, Berkshire Hathaway. When it does its next great BOLT to $200 I'll have a little in Options at $60, 70, or so, since I can not invest in much SHARES AT $90.00.

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