Why I'm Buying Apple (With Some Reservations)

The Prosocial Portfolio I manage for Fool.com is designed to include companies with socially responsible tendencies, and definitely screen out those with antisocial ones. For a long while, I didn't think Apple (NASDAQ: AAPL  ) quite belonged in the portfolio. I recently explained why I wasn't buying Apple (though maybe some investors should).

I've had a change of heart. Given Apple's sharp drop in price, signs of management's increasing awareness of more positive ways of doing business, and the rock-bottom investor sentiment, I'm giving this stock a chance and starting a position.

The business
Does anyone not know about Apple? The Cupertino company founded by the late Steve Jobs started off as a cultish niche player that was never expected to put much of a dent in the Microsoft-dominated (NASDAQ: MSFT  )  computing space. Its Macs may have put the fun, simplicity, and beauty into the home computing experience, but for many, they were viewed as too expensive compared to run-of-the-mill PCs.

Today, the Mac and Apple brands command respect, and Apple offers a device for all kinds of needs. The iPod paved the way for the ubiquity of the Apple brand, and the iPhone and iPad have also found their ways into consumers' hearts (and daily lives).

Why I'm buying
Not long ago, Apple shares soared to outrageous highs, and the company even pushed past ExxonMobil as America's largest by market capitalization. For those following financial news, every headline screamed Apple. In fact, it almost seemed as if Apple was the only stock any American's portfolio should hold.

Today, the sentiment has drastically swung to the opposite direction. The stock has lost nearly half its value from its highs, and it seems as if almost everyone has soured on Apple's future prospects.

This is a perfect opportunity to buy shares. Apple's forward price-to-earnings ratio has dropped to eight times forward earnings, and its PEG ratio is a mere 0.43, signaling an extremely undervalued stock.

Microsoft's trading at 10 times forward earnings, with a PEG ratio of 1.21. Apple is cheaper, and Microsoft's cutting edge dulled a long time ago compared with Apple's stable of products. In other words, Apple's growth isn't going to stall that badly, making it a far better deal than its former rival.

Amazon.com, another company in my portfolio, is currently trading at 73 times forward earnings, with a PEG ratio of 4.68. As much as I believe that Amazon's amazing grip on the consumer experience means it will continue to deliver searing growth, Apple's obviously dirt cheap by comparison.

Google is trading at 15 times forward earnings, with a PEG ratio of 1.1. Again, Google has plenty of growth drivers -- some of which involve competing with Apple's iPhone with Android, of course -- but Apple's simply a great company for an even cheaper price.

The risks
Of course, the negative sentiment right now doesn't come from nowhere. Apple's blazing growth is showing signs of slowing, and many are worried that it won't be able to deliver the same high profit margins that it did in the past.

Apple's new leader, Tim Cook, is probably not the visionary that Steve Jobs once was. Who could fill those shoes, after all? Jobs had a knack for not only foreseeing products consumers want, but also convincing them that they wanted them. For example, take the iPod, a device to store and play gigabytes of music and media in their pockets -- there was a time when no one thought they even needed such things, but now it's simply assumed.

From the point of view of including this stock in the Prosocial Portfolio, I fretted about worker treatment after controversies like the conditions at Foxconn, and what appears to be a lower concern for environmental factors. For example, IBM and Hewlett-Packard may not be at the top of the heap of my investment watch list, but they tend to top lists of green companies.

However, in the last year Apple has seemed to be making progress in more prosocial ways of doing business. It has made moves to work on supplier issues like the ones at Foxconn factories, and to be more transparent than it was in the past.

In addition, Apple's announcement that it will bring some Mac manufacturing back to America is a great step toward bringing more jobs home, where we desperately need them.

Recent photos of Apple's massive solar array to power its North Carolina data center also give me a positive feeling about Apple's stance on renewable energy. In fact, it vows to power every Apple facility with 100% renewable energy, and in 2012, it reached 75%, a 114% increase over 2010 levels.

That's also because it can work on issues like these. Apple has the means to do many positive things with its business. Its huge cash hoard currently stands at about $137 billion and it has no debt. That's one heck of a balance sheet, and it gives it leeway for many things, including building an internal way of doing business that matches the beauty of its products.

The Foolish bottom line
Apple is being treated like a lost company with a tarnished brand. That's the mistake investors often make when they allow negative sentiment to poison their view of a company's actual prospects. It can be hard to know the difference with some companies, but in this case, it's a no-brainer.

I wouldn't have bought Apple at its highs given my concerns. And when it comes to investors' current concerns, those existed when the stock was at its highs, so it's a better buy now than it was then.

Apple is still incredibly profitable and maintains an everyday presence in many Americans' lives. And of course, it possesses one of the best, most-loved brands in the world. Investor sentiment may have soured, but consumer sentiment is actually worth a lot when it comes to positive investments.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (12) | Recommend This Article (13)

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 April 22, 2013, at 1:50 PM, verces wrote:

    Nobody has to be super intelligent when it comes to traditional investing. Look at the market and company valuation and its potential, while Apple will stil make money but it is definitely will not do a double, triple or quadruple in value. Blackberry has better porential to do such move this time. Split your investment as I did.

  • Report this Comment On April 22, 2013, at 6:34 PM, cornbread415 wrote:

    It's quite a stretch to call Apple's share price last fall "outrageous," given the company's cash hoard and still reasonable P/E and PEG ratios at the time. I don't think the P/E ratio ever hit 20, which is hardly "outrageous."

  • Report this Comment On April 22, 2013, at 6:53 PM, TMFLomax wrote:

    Verces, I'm not high on Blackberry, especially given the fact that it's up against iPhone and Android, and from all I've been able to gather, fell very much behind the curve. However, if it can pull that off, it will be something to go into the business history books!

    cornbread415, thanks for bringing up that perspective. I did misspeak (mistype) there -- I suppose the outrageous part was how the stock kept surging on all that constant Apple positive sentiment drumbeating along, but now has been squashed by so much negativity. Looking back on it, you're right that its valuation hasn't looked that outrageous for quite some time given its growth expectations. But like I said, the idea that Jobs' absence might be a stumbling block or that growth might slow was just as much of a risk then as now, it's just that everyone had a delayed reaction or something. Obviously, I do think the price is excellent right now.

    Best,

    Alyce

  • Report this Comment On April 23, 2013, at 4:38 PM, verces wrote:

    I'm typing this over my iPhone. Do the math, for every share of APPL, we can get 28 shares of BBRY and if this stock will climb just 2 percent prior to its earnings on a weekly basis that equates to 20% ROI plus the potential correction on its actual valuation which is at 25%, they can be like APPL of 2007 isnt it? Now you can say it is an assumptions but of course everybody can always assume - but this is an assumptions with hard data on hand. I need the fanboys to be with me on this, after all what we do is investing or making money and the more money we make the more we can make a difference.

  • Report this Comment On April 24, 2013, at 7:36 PM, TMFVelvetHammer wrote:

    Alyce,

    Glad to see you getting on the "AAPL cart!"

    Sorry. Couldn't resist. Seriously, this is a company that has pretty strong positive social positions, and is doing things, as you say, to make a positive impact.

    I like this in the portfolio!

    Fool on!

    Jason Hall

  • Report this Comment On April 25, 2013, at 1:55 AM, kahunacfa wrote:

    Starting with at least ONE MAJOR ERROR, the Apple I and the Apple II existed way before Microsoft and the WINTEL PC's entered the computing environment. The IBM PC was introduced I believe in 1980 or 1981. The Apple was in schools before the IBM PC was introduced, manufactured by SCI Systems of Huntsville, Alabama. The President & CEO of SCI Systems a major Military hardware Company was Olin B. King. The company's Chief Operating Officer was named Warn <I believe> Sapp.

    Kahuna, CFA

    Investment Professional

    1974 - Present

  • Report this Comment On May 17, 2013, at 11:55 AM, TheDumbMoney wrote:

    I agree Apple looks cheap. That said, whenever I have bought a stock and thought my reservations were strong enough to comment on them in my trading notes while buying, I have lost money.

  • Report this Comment On May 18, 2013, at 1:18 PM, spdu4ea wrote:

    Debt free? Didn't they just issue 17b worth of bonds?

  • Report this Comment On May 19, 2013, at 8:09 AM, NickD wrote:

    Yes to raise money give shareholders more money and not get taxed. Apple knows actually what they are doing.

  • Report this Comment On May 19, 2013, at 2:36 PM, Darwood11 wrote:

    Hi Alyce and thanks for this article.

    To be honest, the company that really excites me is Google. They seem to have some idea of what it means to be a "change agent."

    Apple has morphed into something that continues to concern me.

  • Report this Comment On May 19, 2013, at 7:07 PM, spdu4ea wrote:

    Just realized this is a month old article -- not sure why it is on the front page?

  • Report this Comment On May 21, 2013, at 9:56 AM, piranha60565 wrote:

    I think this article is a cop out. Apple is "prosocial" now because they are PLANNING to do more manufacturing in the US, photos of a solar array and because they COULD do more in the future (because they have money)?

    I don't mind the breakdown of Apple as a company but stop trying to sell it as "prosocial", because you've already stretched the term as far as it can possibly go.

    "For example, IBM and Hewlett-Packard may not be at the top of the heap of my investment watch list, but they tend to top lists of green companies"

    - Shouldn't you be finding companies like these that actually fit your investment thesis? Isn't that the point of this portfolio?

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