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Why You Shouldn't Settle for Apple

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Everybody loves an underdog. But now that Apple has become the biggest company in the market, you can't treat the Cupertino Colossus as an underdog anymore. And with a price tag approaching $600 billion, you have to ask yourself: Can't you find better value elsewhere?

Obviously, the case for Apple is strong. With almost $100 billion in cash and huge positive cash flow adding to that figure every quarter, Apple doesn't look terribly overvalued even at its current lofty heights, especially in comparison to past tech-stock highfliers. Still, it's illuminating to look at what alternatives you have to buying Apple shares right now.

Buying an entire market
Apple's amazing rise has prompted numerous comparisons. With its market cap exceeding the size of most national economies, it's hard to put Apple's size into a meaningful context.

One interesting perspective comes from comparing Apple to a large group of companies. Barron's pointed out recently that Apple's value exceeds the entire combined market cap of the roughly 600 members of the S&P SmallCap index. The note went on to justify that valuation, pointing out that Apple has far more current income than those 600 stocks combined.

But net income is just one measure of valuation, so I decided to take a closer look at some of the stocks that make up the S&P SmallCap index. In particular, since Apple is famous for fast growth, I searched out stocks with earnings growth rates of at least 50% annually over the past five years. Out of the 17 stocks that passed the test, I think the following are worthy of a further look.

Prospect Capital (Nasdaq: PSEC  )
This business development company takes advantage of a quirk in the tax code that gives it preferential tax treatment in exchange for paying out most of its income in dividends. With a focus on facilitating investments in the energy sector, Prospect is in one of the most lucrative segments of the economy right now. Prospect trades at an attractive valuation and pays a double-digit dividend currently, and as long as energy activity stays strong, the company has plenty of room to see its stock price rise from here.

Ebix (Nasdaq: EBIX  )
Ebix makes software for the insurance industry. That may seem like a slow-growth business, especially given that many insurers are reeling from massive losses in 2011 and weak economic conditions. But despite setbacks, Ebix has bounced back as it starts to look into expanding into health-care data and financial information exchange. Health-care IT in particular appears to be a priority for the U.S. government right now, and if it can get a head start, Ebix may be able to cash in on the business.

Veeco Instruments (Nasdaq: VECO  )
Veeco produces materials for data storage as well as solar energy and LED applications. Solar is an area that has struggled lately, as low prices and falling subsidies are threatening the fundamentals of the industry. But stronger prospects for LED, especially as a lighting alternative, may be the growth driver of the future for Veeco -- and if the company can capitalize on this, then its depressed stock price could rebound in a hurry.

iRobot (Nasdaq: IRBT  )
This robot maker finds itself in two ice-cold industries right now. Its defense applications are falling prey to budget-cut fears, while its consumer products carry a reasonably high price tag. Even so, its Roomba vacuum has managed to keep the company afloat. All iRobot needs to reawaken its past growth is for the defense budget to get firmed up. That would allow the company to make reasonable projections and move forward.

Sturm Ruger (NYSE: RGR  )
Continuing the defense theme, Sturm Ruger has benefited greatly from huge demand for firearms. The company has actually had to suspend new orders until next month in order to give it a chance to work down an unmanageably large backlog. That's the sort of demand that can give Apple a run for its money.

What's worth more?
On top of these five stocks, you could get 595 more absolutely free for the same cost you'd pay for Apple. Apple may be a crowd favorite, but you have to imagine that at least some of these small-cap prospects will pay off even better for investors.

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Fool contributor Dan Caplinger only settles when the settlement is good. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Ebix, Apple, and iRobot, as well as creating a bull call spread position in Apple. 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 Fool's disclosure policy never makes you settle.

Read/Post Comments (3) | Recommend This Article (16)

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 10, 2012, at 12:11 PM, millsbob wrote:

    i was going to nominate this for dumbest TMF article title of 2012.

    then i read the subtitle on my RSS feed.

  • Report this Comment On April 10, 2012, at 12:21 PM, hiddenflem wrote:

    so if i understand the article right the author wants us to not buy a company at the top of it's game because of the high market cap (no argument related to other more intelligent valuation metrics) and instead buy a depressed tech company hoping that things will turn around. you can keep your irobot, i'll take apple any day.

  • Report this Comment On April 10, 2012, at 12:21 PM, hiddenflem wrote:

    april 1st was 9 days ago...

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