5 Stocks to Buy Before Apple

Consider these five first.

Anand Chokkavelu
Anand Chokkavelu, CFA
Jul 27, 2010 at 12:00AM

I'm going to play devil's advocate here for a moment. Too many investors get excited and jump into a stock without comparing and contrasting against other possibilities. Before you buy shares in the iPhone/iPad/iMac-maker Apple (Nasdaq: AAPL), let me give you one (hopefully) compelling reason to consider one of these five other stocks.

The one compelling reason for graphics chipmaker NVIDIA is "bang for your buck." It's trading at 11 times forward earnings before you factor in the fact that it holds net cash equal to over a quarter of its market cap. Not bad for a company analysts expect to grow at 13% annually for the next five years.

Windstream Corporation (Nasdaq: WIN)
If you wish Apple would pay a dividend, check out Windstream -- it pays a massive 8.7% dividend. Now, rural telecom services are pretty much the opposite of sexy, but hey, you can't have your iPhone and a dividend, too. Apple and Windstream would also make an intriguing bundle purchase -- one cutting-edge, growth-oriented dividend refuser plus one slowly dying dividend Santa Claus.  

To drive the point home, contrast Windstream with Vonage (NYSE: VG), the voice-over-IP never-was. Both have seen stagnating sales, but Vonage offers no dividend and so many years of consistent losses that it has negative equity. I'd be pressed to find a compelling reason for the latter.

But if big dividends aren't sexy enough for you, the next two companies may be more to your liking.

Sequenom (Nasdaq: SQNM) and Somaxon Pharmaceuticals (Nasdaq: SOMX)
Apple has been a huge growth stock, both in terms of stock price (up almost 500% over the last five years) and earnings growth (average compounded growth of about 50% over the past five years). But Apple's size makes that type of growth hard to replicate going forward. Remember, the market values it higher than Wal-Mart on a market cap basis.

Big growth requires smaller names.

Two smaller plays in the world of biotech/pharmaceuticals are Sequenom and Somaxon. Bulls on genetic analysis company Sequenom point to its development of a noninvasive Down syndrome test as a possible catalyst. Bulls on Somaxon point to the potential of its sleep aid Silenor as it tries to crack the dominance of Sanofi-Aventis' Ambien and Seprecor's Lunesta. They also hope for a quickie buyout by a larger pharma to boost shares.

Of course, there are plenty of bears on these stocks – short interest as a percentage of float is a massive 34.9% for Sequenom and a lower-but-formidable 19.9% for Somaxon.

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Amazon.com (Nasdaq: AMZN)
Apple is a huge company with unflagging growth expectations and an arguably pricey valuation. If that's your bag, Amazon.com offers a similar profile. Apple fans believe it can continue to grow its current iFranchises and eventually invent the next big thing we didn't know we needed. Meanwhile, Amazon fans see the dominant online retailer grow its core business and make hay in the cloud computing space to boot.  

As you decide between Apple and these other alternatives (or none of the above), remember that one compelling reason does not an investment thesis make. Each reason is merely a starting point. Good luck!

For more stock ideas, check out what could be the best opportunity in a decade