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.
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.