Why I’m Taking Another Bite of Apple Stock

One of my favorite opportunities in investing is identifying whacked out psychology. After Apple (NASDAQ: AAPL  ) reported quarterly results last week, many financial headlines blared about a bad, bad apple. That's ridiculous, and that's why it's time to take another bite.

I manage a real-money portfolio for Fool.com, which I call the Prosocial Portfolio, focusing on companies that in various ways touch on social responsibility. In April 2013, I bought Apple shares (with some reservations).

After all, Apple isn't perfect in this area; few companies come close yet although we are getting closer as more companies retool their businesses for socially responsible factors. Still, there is something to be said for a great brand with much-loved products.

Regardless of investment philosophy, though, Apple shares look cheap.

Perspective beyond paranoia
The dark, depressed end of the market's well-known bipolar psychology doesn't reflect the true story. Here's reality check question to ask. Is tech giant Apple tarnished, hobbled, seeing tremendous numbers of defecting customers and a withering core business? No way.

Apple reported quarterly net income of $13.1 billion, or $14.50 per share -- mind-blowing numbers. Revenue increased 6% to $57.6 billion. Apple generated $22.7 billion in cash flow.

Meanwhile, it's well known that Apple has an astounding amount of cash on its balance sheet -- $40.8 billion, or a whopping $45.70 per share. That's a safe stock for any economic climate.

Apple currently trades at 11 times forward earnings, with a PEG ratio of 0.60. Although forward prognostications from analysts can be very, very wrong -- often another case when investors can figure out solid buys or sells -- given Apple's universe of powerful products, truly dire downward revisions seem unlikely.

Google (NASDAQ: GOOGL  ) , another great company with amazing growth prospects, has been on a major run this year. Google shares are currently trading at 18 times forward earnings with a PEG ratio of 1.41. While its greatness doesn't necessarily make it tremendously overvalued, Apple is cheaper right now.

Let's throw Microsoft  (NASDAQ: MSFT  ) in for good measure. It's trading at 13 times forward earnings, with a PEG ratio of 1.83. However, given the fact that Apple and Microsoft are trading at similar multiples, which one would you rather buy, when assessing which company's products have addictive "wow" appeal?

Yep, Apple is a very good buy.

Risks and rewards
As is the case with any company, of course there's risk. Although the current hysteria is overdone, there is some relationship to real concerns for the long term. Innovation has been lackluster when it comes to the "and wait, there's more" wow factor for which Steve Jobs was known well. I went so far as to express that the iPhone 5c announcement simply ended up feeling "meh" last year.

Last fall, I even voiced some sentiment that Apple might be "Microsoftening." Sure, that was about future risk of too many lackluster product announcements and dwindling innovation. Unlike many of the uber Apple bears, though, I still thought Apple was a hold, and even a good buy. It was just a factor to watch, and one that certainly didn't point to immediate Apple catastrophe.

iPhones and iPads remain leading products. Apple still moved 51 million iPhones and 26 million iPads, both quarterly records and increases of 7% and 13% higher shipments, respectively.

Although many tech giants are involved in phones and tablet computers, Apple isn't exactly yesterday's news. One thing Apple has down pat is its seamless ecosystem of apps, resulting in easy customer experiences. This results in popularity and loyalty.

According to Consumer Intelligence Research Partners, between July 2012 and June 2013, 81% of iPhone users bought another iPhone, compared to just 68% of Android users. The kicker: iPhone grabbed three times more users from defecting Android users, while Android only gained 7% from iPhone loyalists.

Aiming higher
There are a few glimmers of hope that under Tim Cook, Apple may gain more "prosocial" traction in the business than was ever contemplated during Steve Jobs' regime. The truth is, Apple has so many financial resources that there's a lot it could do for certain positive areas.

Apple is one of an impressive set of 300 large American companies that also include Wal-Mart (NYSE: WMT  ) and Ford (NYSE: F  ) involved in talking to the White House about ways alter some hiring factors that have probably hurt job seekers who ended up in more protracted unemployment.

The plan that's being batted around would establish some improved hiring practices, such as putting less negative emphasis on such job hunters. After years of high unemployment, it's simply common sense that those who have been unemployed for a long time aren't "duds."

Employment treatment is one of the major criticisms aimed at Apple's social side. The Foxconn controversies have underlined the worst of outsourced manufacturing. However, it's by no means the only American tech company that takes advantage of the cheap labor to boost profits.

Appetizing Apple
I'm seeking positive returns in the Prosocial Portfolio. Years of bullishness have left us with very few bargain-priced stocks. That makes Apple even more appetizing right now.

On the watch for the wearable tech revolution
Investors have been dying for more innovation from Apple, and products like the iWatch are generating like a buzz. Guess what -- this revolution ison its way, and there are ways investors can get in now. If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.


Read/Post Comments (15) | Recommend This Article (42)

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 February 04, 2014, at 5:01 PM, duuude1 wrote:

    I think that's a great move Alyce.

    Another company I would suggest from both an over-reaction and a valuation perspective is AMZN.

    I don't mean value with respect to earnings since earnings are such a manipulable and gray measure of performance - but price to sales.

    AMZN is cheaper than AAPL and much cheaper than MSFT on P/S.

    Duuude1

  • Report this Comment On February 04, 2014, at 5:06 PM, kickbishopbrenna wrote:

    I have to agree, eve though I'm an apple bear and have/use none of their products much..bought more today too.

  • Report this Comment On February 04, 2014, at 5:21 PM, corpgov wrote:

    Good analysis Alyce; worth and extra bite. I bought more as well. The "problem" is the money pile.

    The current Board fails to recognize that decision-makers with huge amounts of options or restricted stock units (RSUs) are incentivized to enhance the value of those equities through stock buybacks, instead of by allocating resources to innovation. Its like fishing with dynamite. Learn from history.

    Between 1986 and 1996, dividends totaled $457 million while stock buybacks totaled $1,761 million, nearly four times as much. While dividends rewarded shareholders for holding stock, repurchases rewarded shareholders for selling the stock. The purpose of stock buybacks was to boost the company’s stock price. Who were the prime beneficiaries? They were the company’s top executives, such as John Sculley and Michael Spindler, with their stock-based pay, running Apple into the ground.

    Today, incumbent management risks being too deeply in bed with value extractors. Apple is in danger of seeing productive employees as a profit-reducing expense, rather than as value-creating assets. One exception was instituting a new retention mechanisms, “Blue Sky,” which allows engineers to work on their own projects on company time. But instead of essentially ceasing the award of stock options to such initiatives (fearing a soaring stock price will lead too many employees to get too rich to retain), Apple needs to design incentives to reward internal entrepreneurs.

    I'm encouraged by Apple recently pouring more into R&D but I still think we need proxy access to ensure the board is more fully accountable to shareowners. See http://corpgov.net/2014/01/proxy-access-is-needed-at-apple/

  • Report this Comment On February 04, 2014, at 5:33 PM, cmalek wrote:

    "However, it's by no means the only American tech company that takes advantage of the cheap labor to boost profits."

    When WalMart "takes advantage of cheap labor to boost profits", you are on them like a ton of bricks. But when Fruitco does the same, you not only give them a pass by saying "it's by no means the only American tech company" doing that but you then go out and buy more shares for your Prosocial Portfolio. A bit hypocritical of you, don't you think? I was under the impression that the Prosocial Portfolio is for goody-goody companies that are "socially responsible."

  • Report this Comment On February 04, 2014, at 5:34 PM, 6times wrote:

    Alyce,

    You wrote, "Apple currently trades at 11 times forward earnings, with a PEG ratio of 0.60." That means its underlying earnings growth rate (G) is approximately 18%. That seems high.

    6times

  • Report this Comment On February 04, 2014, at 7:02 PM, Intaglio7 wrote:

    Please define "meh" as in:

    I went so far as to express that the iPhone 5c announcement simply ended up feeling "meh" last year.

  • Report this Comment On February 04, 2014, at 10:14 PM, Davidovich wrote:

    Here's my one big question about Apple stock: is it in fact currently priced on the assumption that Apple will never again create a new product or service? If that is assumed, I can see why the stock remains depressed. However, if there is any chance they will come up with *something* new, whether a watch, TV, payment service or even an 8-bit video game, the stock is dramatically undervalued. Buying Apple at $500 will likely appear the act of a market genius in a year or two.

  • Report this Comment On February 07, 2014, at 2:13 PM, WineHouse wrote:

    Price per sales is another way of saying "revenue." Amazon has a lot of sales, but the margins are very slim. The profits are low. The P/E is over 600 as of today, and it pays no dividends. This is definitely NOT a "cheap" stock. Haven't you heard the old Yiddish joke about the shopkeeper whose prices were so competitively low that he lost a few pennies on every sale, but he made it up on volume?

  • Report this Comment On February 07, 2014, at 4:46 PM, SkepikI wrote:

    So, Alyce- if the Tiffany &co of grocery, WFM, and the Tiffany & Co of electronics AAPL are "prosocial" and to your liking, WHY NOT the actual Tiffany & Co? They pay their people well, subsist well short of flyover country, and only exploit the rich ;-)

    No, I dont own any shares but might consider it if you say they make the grade. I did own AAPL, till they got overheated IMO and dropped out before they skidded. Might actually reconsider if they get down below 450 again...

  • Report this Comment On February 08, 2014, at 12:26 AM, FrankoJames wrote:

    This could be the best analysis of AAPL ever written by a Motley Fool employee. God bless the USA and SONC.

  • Report this Comment On February 09, 2014, at 8:06 AM, Mathman6577 wrote:

    Good article.

  • Report this Comment On February 11, 2014, at 4:12 PM, CoreAndExplore wrote:

    By only including actual cash and short-term reserves in your definition of "cash on hand" you kind of short-change AAPL. Including all marketable securities, AAPL has roughly $160 billion, or $179 per share. I saw that in another Fool article and I don't understand why you guys are separating out cash from other investments, no other analysts really do this, not in these kinds of articles.

  • Report this Comment On February 11, 2014, at 4:43 PM, TMFLomax wrote:

    CoreAndExplore, yes, it's $160 billion all told. I think Apple's the only company in which everyone focuses big time on both, but yes, regardless it does have a heck of a lot of cash. On the discussion board related to this portfolio, I referred to the figure I used as "cash cash." ;) Cash easily on hand by definition.

    Skepicil, your comment about Tiffany is funny. ;)

    Best,

    Alyce

  • Report this Comment On February 14, 2014, at 1:09 PM, TLCnMe wrote:

    Alyce,

    I wonder if you were Korean, working for a Korean financial website, you would not be saying the same thing about LG, Samsung etc. Just wondering . . . . .

  • Report this Comment On April 14, 2014, at 5:51 AM, thidmark wrote:

    cmalek pegged it.

    "Social responsibility" be damned, as long as you can make a crapload of money, right?

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