Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



2 Low-Risk Stock Picks in Tech

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

With respect to stocks, Merriam-Webster defines risk as "the chance that an investment (as a stock or commodity) will lose value." So how can we mitigate this risk? Many investors simply choose to avoid riskier sectors, like tech. But there's a better way. Mitigate the chance for loss by buying stocks with a margin of safety. On that note, here are two low-risk stock picks: Apple (NASDAQ: AAPL  ) and Baidu (NASDAQ: BIDU  ) .

Economic moat
"In business, I look for economic castles protected by unbreachable moats," Warren Buffett has famously said.

Determining a company's margin of safety is impossible if the company doesn't possess some sort of economic moat. An economic moat is what protects a company's future cash flows from competitors. If a company doesn't have any sort of competitive advantage, it would be impossible to estimate future cash flows, a key ingredient to any stock valuation. And a margin of safety, of course, cannot be determined without valuing a stock to determine your best estimate of the company's value.

Both Apple and Baidu are definite leaders in their respective markets, giving them considerable scale in comparison to their competitors. Apple, according to Canaccord Genuity, boasts 57% of worldwide smartphone profits despite just 8% worldwide smartphone market share, and Baidu has China's online search market wrapped up, with about 73% market share. 

Scale, therefore, gives both Apple and Baidu definite competitive advantages that won't disappear overnight. I've recently written in more detail on Apple's economic moat here, and Baidu's here.

Margin of safety
Estimating a company's margin of safety begins with a valuation. I'll use one of the most common methods: a discounted cash flow valuation.

Analysts, on average, expect EPS growth of 20% per annum for both Apple and Baidu over the next five years. But let's modify these estimates with some conservatism.

Samsung is undoubtedly quickly gaining on Apple in terms of the industry's share of profits. On that note, I'll predict 8% growth in EPS in year one for Apple, and decelerate that growth rate by 10% each year for the next 10 years. By year 10, growth expectations would be about in line with inflation, at 3.1%. In years beyond 10, we'll estimate 3% growth per annum.

Baidu is facing some tough competition from browser-maker Qihoo 360. But the search business is far less wishy-washy than Apple's business model, which is highly dependent on blockbuster products. So, I'll stay closer to analysts' estimates -- going with a 15% estimate in year one, estimating this growth rate to decelerate by 5% each year. By year 10, growth expectations would equal 9.5% -- still fairly high, as the company rides the wave of a growing Chinese economy that will increasingly increase their spending in digital advertising.

Tech stocks can be cheap, too
The results? Apple and Baidu trade at 34% and 23% discounts to fair value, respectively. A margin of safety of just 23% is borderline, but a whopping 34% discount to fair value for the top company on Fortune's 2013 World's Most Admired Companies list is a steal.

So, add these two stock picks to your watchlist, and consider adding Apple to your portfolio. Both stocks remain top picks among my CAPScalls.

Apple has a history of cranking out revolutionary products ... and then creatively destroying them with something better. Read about the future of Apple in the free report, "Apple Will Destroy Its Greatest Product." Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.

Read/Post Comments (1) | Recommend This Article (5)

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 May 31, 2013, at 11:03 PM, bigcookieman2 wrote:

    Apple offers a decent safe dividend about 25% of earnings. The $450 to $500 price is decent for the stock if you totally disregard the $150 a share they have in cash. If they decide to spend that cash they could buy all but the top 10 S&P 500 companies with change left over. They could buy Disney or B of A. I'd like to see them start an investment company like Black Rock. start with 125B and add 25B a year for 5 years would make that a monster added to Apple.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2463699, ~/Articles/ArticleHandler.aspx, 9/27/2016 4:47:54 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 7 hours ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 4:00 PM
AAPL $112.88 Up +0.17 +0.15%
Apple CAPS Rating: ****
BIDU $188.86 Down -2.86 -1.49%
Baidu CAPS Rating: *****