The first things I look for in a potential investment are a great brand, lots of cash and little or no debt, the vision to capitalize off current social trends, and the potential for high growth. When I was asked a few months back to participate in the Fool's forward-looking stock tome Stocks 2006, I found all those in concert in a retailer that has great prospects for the years ahead.

But the retailer in question wasn't the only stock with such characteristics, of course. There is, after all, a high-growth superstock that embodies those attributes: a great brand built to capitalize off consumer trends, generating cash without taking on excessive debt. Indeed, it's on just about everybody's minds these days -- the public's (and investors') fandom is borderline obsessive these days. So, in keeping with the search for high growth, there was always an old idea -- Apple (NASDAQ:AAPL). I've had mixed feelings about the stock (not the company) for the past two years, but given recent momentum, it was difficult to ignore this amazing story.

Of course, Apple's recent share price seemed ridiculous. However, the more I mulled it, the more I thought that while it was plenty risky, maybe -- just maybe -- it wasn't such a crazy thought after all. Let's consider this a little further.

Choking on Apple's price?
Over the past year, Apple shares have just about doubled, and a surge in holiday iPod sales caused more euphoria. Apple currently trades at 39 times trailing-12-month earnings. Yes, I know: Apple's been trading at high multiples for quite some time, and just look at how the stock has performed. But Foolish colleague Nathan Parmelee recently performed a discounted cash flow calculation on Apple shares and didn't see much (if any) upside in the company's shares.

Still, there's a lot to like. Apple's compound annual growth rate in sales and net income over the past two years has been 55% and 239%, respectively. In the first quarter of 2006 -- the hopping holiday quarter -- that astounding growth continued. Apple's earnings nearly doubled on a year-over-year basis, while revenues increased 65%. Although Apple gave a lower forecast than many expected, it's known for conservative guidance.

Apple carries a large amount of cash on its balance sheet, with no debt. In its more troubled times, it always had cash to fall back on. At the current $8.7 billion, Apple has about $10 per share. (Of course, many Fools can and do often opine on the subject of Apple's share dilution.)

Sure, Apple's growth rates can justify some of the simpler valuation metrics. The question is whether such growth is sustainable far into the future, and that's where things get tricky. At what point will Apple's shares go rotten when growth stalls? Will investors know when to admit that its go-go days are done?

So many recipes
Why are so many investors upbeat? There's still the possibility (a good one, in my opinion) that many iPod users will switch to Mac computers. Last quarter, Apple said that more than 45% of the customers buying computers in its stores are new to Mac. And the switch to Intel (NASDAQ:INTC) chips in new Macs -- available six months sooner than previously anticipated -- should allow the company to capitalize off its powerful tailwinds at the moment by marketing faster, more powerful Macs.

Apple's retail stores haven't nearly reached saturation, and if you've been to one lately, you've probably seen for yourself what an "experience" it can be. Last quarter, $1 billion of the company's $5.7 billion in sales came from Apple retail stores.

IDC recently said that 106 million MP3 players will be purchased in 2006; at the moment, the iPod owns 70% of the market. Obviously, a big part of Apple's future relies on the iPod's continued dominance, since it's significantly polished the Apple brand and spurred a possible "halo effect" of increased Mac sales. There are plenty of high-powered rivals who want a piece of the MP3 player market; Sony (NYSE:SNE), Dell (NASDAQ:DELL), and Creative (NASDAQ:CREAF) have competing MP3 players, and they're drooling over the opportunity to woo consumers.

Last, there are the issues of whether Apple can attract new users to buy iPods and convince existing iPod owners to upgrade. It's quite possible that many existing iPod owners won't be willing to shell out yet another $400, again and again, for the latest model. (And how long will Apple be able to add must-have innovations to each new model?)

The answer is ... there is no answer
All right, so here's my final answer about Apple as an investment right now: I don't know. I certainly don't want to go on record saying, "Don't buy Apple." I am impressed -- the company has proved bears wrong for several years now while the iPod became an absolutely amazing phenomenon. However, it just seems nearly impossible to extrapolate what future growth rates will be.

A lot of things have to go right. As far as I can tell, to justify its valuation well into the future, Apple needs:

  • Lasting domination of the MP3 player market
  • Continued and increased migration to Mac computers
  • iPod owners' forgiveness of a swift product upgrade cycle
  • Consumers' persistent ambivalence to competing MP3 player offerings
  • Expansion of the Apple retail store base

It also goes without saying that Apple needs to keep innovating and evolving.

In other words, a lot of things have to go right, and not many can go wrong. And of course, at some point, what's known as the law of large numbers is going to kick in (it always does). That's why I couldn't pull the trigger on Apple as my Stocks 2006 recommendation. There are plenty of risks investors need to be aware of -- maybe now more than ever.

For now, I'll keep on loving Apple the iPod Innovator. As for Apple the Stock? It's been a great story thus far -- one that I look forward to watching as 2006 unfolds.

To view Alyce's pure-play retail recommendation, as well as 11 other recommendations for the year ahead from Fool analysts, click here to learn more about Stocks 2006. As always, the Fool's money-back guarantee stands behind the offer.

Alyce Lomax does not own shares of any of the companies mentioned. Dell is a Motley Fool Stock Advisor selection. The Fool has a disclosure policy.