Rising Stars: Buy Apple, Again

This article is part of our Rising Star Portfolios series.

Those who have followed my portfolio know I purchased ION Geophysical shares in late November. Earlier today I also made a move to purchase Schlumberger. While I'm keenly focused on opportunities in the oil patch, my "common sense" portfolio is built around investing anywhere in companies that I can understand, and where it's easy to see potential upside.

One such play right now is Apple (Nasdaq: AAPL  ) . What makes this company such a common sense play? Simply put, barring unlikely scenarios, Apple is poised to blow away expectations in the coming year. I discussed the matter in great detail with fellow Fool Eric Bleeker, and he discussed the numbers in his buy recommendation yesterday, which I recommend investors read.

So what makes Apple so common sense?

1. Investors are afraid that Apple is bumping up against the law of large numbers, and are afraid to invest in the company as it crests past $300 billion in value. I'm not letting that deter me, because as Eric showed yesterday, despite the enormous hype surrounding smartphones, their outsized growth rates have only recently taken off.

Source: Gartner.

iPhone sales managed to grow 93% last year (while smartphone sales in general were predicted to have grown 51%). That comes in spite of massive competition from Google's (Nasdaq: GOOG  ) Android. This situation might be scarier if iPhone selling prices were collapsing, but they've actually risen in the past year! Simply put, Apple has the tools in place to outperform iPhone projections this year.

2. The iPad is another key source of growth. As Eric demonstrated in his pitch yesterday, analyst expectations for iPad sales align with a scenario where Apple sells only about 20 million to 25 million units next year. That should prove light. Despite an oncoming glut of tablets, Google is still working out significant kinks with its new tablet version of Android, which should push most viable tablet competitors past the time Apple releases its iPad refresh sometime in April. Paired with an adept pricing strategy that puts initial iPad price points at $500, a level that's difficult to undercut by a meaningful margin, the iPad should maintain its dominant market share this coming year.

3. Projections don't take into account the massive uptake in other Apple products. While the iPod continues its flat-lined growth, areas like Mac sales have been growing at 26% annually. It’s a virtual certainty that sales of products like Macs and digital downloads should rise as consumers adopt other Apple products like iPads and iPhones in every increasing numbers, yet little of that is built into current expectations.

I'm a bit more sanguine on Apple's long-term prospects. We're still early into the mobile game, and no investor has all the answers on how this will shake out. Likewise I'm loath to go the often-used route of riding Apple's success by buying its chip suppliers like Broadcom (Nasdaq: BRCM  ) or TriQuint (Nasdaq: TQNT  ) , either because Apple is still a relatively small part of revenues (Broadcom) or because assessing the companies' ability to maintain a spot in future generations of iDevices is beyond the "easy to understand" mandate I follow in the "common sense" portfolio.

However, even with long-term reservations, there is little doubt Apple will outperform in the coming year. That's why I'm putting roughly 6% of my portfolio behind Jobs & Co. Just run the numbers. I know it sounds crazy, but 2011 will be another banner year for Apple.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. Click here to see all of our Rising Star analysts (and their portfolios).

Bryan White owns shares of no companies listed above. Google is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor selection. The Fool has written puts on Apple. The Fool owns shares of Apple, Google, and ION Geophysical. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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 (10)

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 January 07, 2011, at 2:38 PM, bugnuts wrote:

    Bryan, you seem surprised at Apple's success. This company has been building a highly profitable fortress of products and experiences for years, but many chose to ignore it.

    Smartphones are just taking off. Tablets are just taking off. China is just taking off. This isn't about 2011. It's long-term.

  • Report this Comment On January 07, 2011, at 2:49 PM, Thompr97 wrote:

    Bryan,

    your arguments here are valid. The interesting thing is, however, that the same arguments have been valid - obvious even - for a long time now. If you are just coming to these conclusions, then you have missed out on a good ride. Not to fear, a good ride is still coming for all of the reasons you stated.

    But for future reference, you should beef up on your forward vision skills so that you don't have to say something like "Apple is a buy again", when it never really stopped being one. Not for the last 4 years, at least. Even when they were low in sympathy for the market, they were a great buy. Especially then, actually. And if you are a buy and hold person who has time to wait, they were even a good buy before the big plunge. (Unless you had weak hands and/or vision and bailed at the lows.)

    Thompson

  • Report this Comment On January 07, 2011, at 3:20 PM, JokerJoey wrote:

    The article is well thought, but it's missing one small detail:

    As the market continues to develop, Apple continues to make new innovations. It should not surprise you to assume that for every innovative product Apple currently markets, there are three or four either refined models or completely new devices waiting to be released. So while for example, the new iPad2 may be the big thing for this year, who knows what they'll come up with by this time in 2012.

    I have long predicted that by the end of Calendar Q1 of this year the stock will trade between $400 and $450. We're not all that far off right now, and January 18 & 19 should be a very interesting pair of days.

  • Report this Comment On January 07, 2011, at 3:23 PM, TMFCaccamise wrote:

    bugnuts & Thompr97,

    I'm not surprised at Apple's success at all. I work on Stock Advisor where it has been a recommendation for a long time. This is a new portfolio so I'm adding it now - not because I just came to these conclusions. Thanks for the feedback!

    Bryan

  • Report this Comment On January 07, 2011, at 3:32 PM, TMFRhino wrote:

    To add, the title "Apple is a Buy, Again" refers to the fact someone (me, in this case) recommended buying it yesterday. Not that it ever stopped being a buy.

    -Eric

  • Report this Comment On January 07, 2011, at 4:23 PM, FoolSolo wrote:

    I've been in Apple since $87, and have been quite pleased with the performance. With as much profit as I have in the stock, I've been a bit defensive, thinking the stock has had a great run, I need to lock in my profits. However, for such a stellar performing stock, the numbers are still actually quite reasonable, with p/fcf around 18.

    Given the action around the iPhone and iPad, and now the new Mac App store, I will simply hang on now, and may sell puts on the stock to generate additional profits from options premiums. I would be a little bit cautious about taking a new position in the stock at this price, and would recommend you use options to establish your position. The March $330 put was paying around $20 a few days ago, so if sell it and then the put gets exercised your entry would be $310. If it doesn't get exercised, you make $2000 on each contract you sell. That's a nice income 2 1/2 months.

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