My Top 2 Stocks: SunPower and Apple

Wall Street analysts like to give outperform or underperform calls to tell whether they like a stock or not. But for most of us, it's as simple as asset allocation. I'm going to buy a large position in a stock I like very much and a smaller position in a stock I like but not quite as much.

Two stocks that I've built my largest positions in, and therefore think will outperform the market, are Apple (NASDAQ: AAPL  ) and SunPower (NASDAQ: SPWR  ) . Now, what you've all been waiting for -- here's why.

The market has lost its mind with Apple
Let's start with Apple's products and the incredible ecosystem the company has built. The iPhone is still the driver of Apple and it hasn't been reported enough that Apple gained 3.5% market share to 37.8% between Oct. 2012 and Jan. 2013. Whoever thinks the iPhone is somehow losing steam isn't paying attention to the numbers.  

In the tablet market, Apple is still king, but it has a plethora of competitors nipping at its heels. The good news is that the overall tablet market continues to grow, even if Apple loses share. A report released by IDC today predicted that handheld computer sales (tablets) would be 190.9 million units this year and grow to 350 million units by 2017. Apple's share of this market is predicted to fall to 46% from 51% a year ago, but it is expected to maintain a 43.5% share by 2017 (15% compound growth rate). With the overall tablet growth predicted in the next four years, Apple could lose nearly half of its market share and keep shipments flat. This will be important when we get to valuation.  

From a competitive standpoint, Apple is in a strong position. For one, it appears that Amazon's (NASDAQ: AMZN  ) e-reader obsession is a thing of the past and a form similar to Apple's will win out. IDC says 26.4 million e-readers were sold in 2011, but that number fell to 18.2 million last year and will gradually decline by 2015. From a market share standpoint, Google (NASDAQ: GOOGL  ) will command 48.8% of shipments this year and, after Apple, it leaves 4.7% for Microsoft (NASDAQ: MSFT  ) . Microsoft is the one long-term competitor to watch over the next few years because of its integration with Windows (similar to Apple) and IDC predicts total market share of 10.1% by 2017.

To sum all of that up, Apple is still king among tablets, even if its lead gets a bit smaller.

The PC business will continue a slow decline, but Apple has maintained strong share in this business and that should continue. The company will also likely release some new products over the next few years that will provide a new revenue stream, whether it's a watch, a TV, or something else. I haven't even touched on the sticky ecosystem Apple has built that keeps people buying its products and spending money on iTunes and the App Store. So, if the iPhone is strong, the iPad is growing, Macs are flat-ish, and there are new products coming, the stock should trade with at least a P/E range of 12-15, right?

Today, Apple has a market cap of $405 billion, no debt, and $137 billion in cash. If we look past the tax associated with bringing cash home, that means investors are paying about $268 billion for Apple. The company has earned $41.8 billion over the past year so the P/E ratio is 6.4, and with $56.7 billion of operating cash generated over the past year, the stock trades at 4.7 times operating cash flow. Considering the strong fundamentals in the company's biggest products and potential growth with new product, I think that makes the stock a steal. That's why it's one of my biggest holdings.

The power of the sun
As excited as I am about Apple, I'm even more excited about the opportunity for SunPower (NASDAQ: SPWR  ) . The solar market is just beginning to emerge, particularly in sunny and sustainable markets such as the U.S., Saudi Arabia, Japan, and India.

Oversupply has plagued the industry over the past two years but a few companies are starting to emerge from the rubble. SunPower has seen margins improve over the past year because its more efficient panels can command a premium over commoditized Chinese panels. Quality and bankability also give the company an advantage over rivals. Just look at the margin trends below, which show deterioration among Chinese competitors and improvement at SunPower.

 

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

SunPower 

11.3%

12.7%

15.1%

14.1%

18.7%

First Solar 

20.9%

15.4%

25.5%

28.4%

27.3%

Trina Solar

7.1%

5.8%

8.4%

0.8%

1.9%

Yingli Green Energy

3%

7.8%

4.6% 

-22.7%

8.5% 

Source: Company earnings releases.

Note: All gross margin numbers are comparable on a company level. SunPower's gross margin is non-GAAP because systems business creates volatile margins quarter to quarter.

Wall Street is just starting to believe in the power of the sun and SunPower is seen as one of the clear winners, for the reasons I discussed above. The stock is already up 98% this year, but I think there's a lot more to come. In a very simple multiples analysis I did last month, I saw that a $30-per-share stock is very reasonable and $80 per share isn't at all out of the question. Yes, I said $80 per share from $12 today. If competitors continue to go bankrupt and SunPower is able to boost capacity at higher margins than it has today, even that price may not be enough.

This isn't an investment without risk. Some of the largest solar module manufacturers have gone bankrupt in the past year alone. But a few companies will emerge from this industry and those that do will make investors a lot of money. That's why SunPower is one of the largest holdings in my portfolio.

What is our CEO betting on
Apple and SunPower are my top two stock holdings, but our co-founder, Tom Gardner, recently revealed his top two stocks as well. For the names of that surprising pair of companies, just click here.


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  • Report this Comment On March 12, 2013, at 11:15 PM, bigcookieman2 wrote:

    I totally agree with Apple and most of my new money is buying Apple. Somehow the talking heads of Wall Street have turned having 130B in cash into a negative. With at least another 40B in profits this year and a measly 10B dividend payment. Which makes them one of the top dividend payers out there. When they actually spend some of this money making some aquisitions boosting their profits even higher they all of a sudden will become a good company again and the price will rocket up.

  • Report this Comment On March 13, 2013, at 12:46 PM, StopPrintinMoney wrote:

    APPL is a toast. Don't feel bad about buying it though, you're doing what you are told.

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