7 Stocks to Consider Before Buying Apple

Too many investors get excited and jump into a stock without comparing it with other possibilities. This is true for great stocks, and it's true for terrible stocks. What I'm about to do is play devil's advocate.

In this series, I try to help investors see the possibilities by highlighting a few companies as reference points as they decide whether to jump into the stock.

Today's stock is Apple (Nasdaq: AAPL  ) , arguably the hottest large-cap stock in the market. Its two-year price chart is pretty much straight up. It sits above $300 a share today, and an average of 18.9 million Apple shares trade daily. That’s roughly $6 billion of stock trading hands daily!

Before you pull the trigger, let's look at a few companies in Apple's space. I've divided them into two groups: Apple's fellow sharks (its large, value-priced tech behemoths) and Apple's remoras (smaller companies that gain from Apple’s success).  

Apple's fellow sharks
Every successful growth stock eventually loses steam and has to deal with becoming a larger, slower-growing company. Outside the tech space, we're seeing that with Starbucks.

At some point, as expectations and price multiples decrease, growth stocks may even turn up on value investors' radars.

Four such companies are Hewlett-Packard (NYSE: HPQ  ) , Intel (Nasdaq: INTC  ) , Cisco (Nasdaq: CSCO  ) , and Microsoft.

These mature tech companies are nowhere near the growth monsters they used to be. And the market is pricing them as such. If you believe analyst estimates, they trade for forward earnings multiples of 7.5, 11.1, 10.4, and 10.1. And that doesn't account for any cash on their balance sheets. Except for HP, each has a net cash balance -- i.e., more cash than debt.

I've been especially intrigued by Cisco recently. In fact, I recently bought shares. Read more.

Apple's remoras
One way to play Apple's success is to buy shares in its component makers. My fellow Fool Sean Williams recently highlighted three of them: Cirrus Logic (Nasdaq: CRUS  ) , Broadcom (Nasdaq: BRCM  ) , and TriQuint Semiconductor (Nasdaq: TQNT  ) . The allure here is that they're smaller than Apple and certainly less known. Hence, there could be an opportunity to unearth an Apple play that the market hasn't fully caught onto yet.

Foolish tech expert Eric Bleeker recently recommended Cirrus Logic in his real-money portfolio. So far, so good. The shares are up by 27% in a month.

The danger in Cirrus Logic is the double-edged-sword nature of the play. The more business it gets from Apple, the more it can ride Apple's success. However, the more business it gets from Apple, the more it's beholden to Apple. In the extreme case, the loss of Apple for a smaller customer like Cirrus Logic can mean very bad things for the stock price.

As it stands, Eric sees more in Cirrus Logic than just an Apple play, though. Read his most recent Cirrus Logic write-up.

The final reminder
As you decide between Apple and these other alternatives (or none of the above), remember that I mention each of these companies not as recommendations, nor as a criticism of Apple (Check out my thoughts on the company.) Instead, it's always a good idea to analyze many semi-related companies before making a buy decision. Good luck!

For some more stock ideas, check out The Motley Fool's free report: Top 2 Plays for the Coming Tech Boom.

Anand Chokkavelu owns shares of Cisco and Microsoft. Intel and Microsoft are Motley Fool Inside Value recommendations. Apple and Starbucks are Motley Fool Stock Advisor picks. The Fool has written calls (bull call spread) on Cisco Systems. The Fool owns shares of and has bought calls on Intel. Motley Fool Optionshas recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Cirrus Logic, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (15)

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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 December 05, 2010, at 9:25 AM, Henry3Dogg wrote:

    "7 Stocks to Consider Before Buying Apple"

    The title says it all. Consider the other 7, and then buy Apple.

  • Report this Comment On December 05, 2010, at 11:40 AM, FutureMonkey wrote:

    @Henry3Dogg

    You win the thread before any of the rest of us got a chance.

    FM

  • Report this Comment On December 05, 2010, at 4:06 PM, TMFBomb wrote:

    @Henry3Dogg and FutureMonkey,

    Haha. And that's a very valid conclusion!

    -Anand

  • Report this Comment On December 06, 2010, at 10:40 AM, EquityBull wrote:

    Apple should earn at least $22/share in earnings for 2011. Growth this year top and bottom is 50% plus. Should that get cut in half for 2011 (unlikely but let's go conservative) that would be 25% plus growth. Put a more conservative multiple of just 20 on it and you get $440 per share. Then add $50/share in cash and you get to $490.

    My target by end of 2011 and I'll probably under shoot with this is $500/share. Should apple split at least 5 for 1 (10 for 1 would be better) then perception among pros and amateurs would be that apple is cheap. This would propel the stock to higher multiple of 30 to 50 yielding a $600 to $1000 stock. Keep in mind that this target ONLY gives apple a fair PEG of 1.0

  • Report this Comment On December 15, 2010, at 9:05 AM, jamieray1975 wrote:

    i was thinking of trying to invest in apple stock, but dont know the first thing of how to get started! where or how to buy? need to start building some retirement before gets to late. course gotta start very, very small" hard times". any tips or suggestions greatly appreciated. thanks jamie

  • Report this Comment On December 15, 2010, at 9:15 AM, jamieray1975 wrote:
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