Is Apple Inc. (NASDAQ:AAPL) a growth stock or a value stock? What about Microsoft Corporation (NASDAQ:MSFT) or Cisco Systems, Inc. (NASDAQ:CSCO)? The truth is, it doesn’t matter. All of these businesses are now priced as if they were purely value-based investments with only average prospects for growth. Whether you agree or disagree with that view, they all represent exceptional opportunities for profits for those who buy today for future growth or current value.
Growth or value, take your pick
As shares of Apple Inc. (NASDAQ:AAPL) struggle to find support from investors and bounce between $420 and $450, the two big questions on the minds of investors are whether we are seeing the bottom in the share price and if the days of Apple as a high-growth business are over. For long-term investors, the answer to these questions don’t matter.
At some point for any high-growth business, growth slows. When that happens, the company’s valuation is reduced by the market to a level more in line with lowered expectations of future earnings growth. At Apple’s current share price, the company is priced as a value stock. However, with a forward five-year projected earnings growth rate of 15.1% and a price-to-earnings ratio of 9.59, this stock could rise 50% from current levels and only be priced in line with the S&P 500. It would have to triple in price to reach the two times earnings growth rate often assigned to favored growth stocks.
If Apple Inc. (NASDAQ:AAPL) is still a growth stock, it could easily triple from its current valuation and pass $1,000 a share, a level that was predicted by many analysts just a few months ago. If Apple has now become nothing more than a large capitalization value play, it can rise 50% from the current level and then grow the share price 15% per year over that, and just meet S&P 500 averages.
For investors who are only interested in profits, either outcome for Apple will provide capital appreciation of more than 15% annualized for the next five years, while collecting what is currently a 2.5% dividend yield along the way. With a current payout rate of only 12%, Apple has plenty of room to raise the dividend. One thing is certain, though–Apple Inc. (NASDAQ:AAPL) enjoys global brand recognition, provides popular products, and will be with us for a very long time into the future.
The world’s software supplier is a buy
One business that has already made the transition from a hyper-growth story to a value play is Microsoft Corporation (NASDAQ:MSFT). As the world’s leading provider of operating systems software for business and consumer use, Microsoft has become so large that it is almost impossible for any new product to have a significant impact on the total business. Therefore, it grows based upon population and economic growth around the world.
While the transition has been a painful one for those who bought the stock back in 1999 and 2000, when it was valued at obscene levels but was also one of the darlings of Wall Street, it is now one of the most reasonably valued businesses around. Microsoft Corporation (NASDAQ:MSFT) grows earnings at 10% per year and provides investors with a dividend yield of 3.2%. This scenario provides value-oriented investors with a reasonable expectation of a 13% annualized return based upon the sum of earnings growth plus dividend yield. 13% is an exceptional return on a safe, steady business that dominates its industry like Microsoft.
Always be willing to make a switch in positions
Prudent investors are always willing to switch positions when circumstances warrant it. Today, the market valuation applied to switch and router maker Cisco Systems, Inc. (NASDAQ:CSCO) requires serious consideration from investors. Cisco’s products facilitate Internet traffic and will continue to be essential through upgrades and in the transition to remote data storage and cloud computing.
As is the case with Microsoft Corporation (NASDAQ:MSFT), Cisco was a darling of Wall Street during the Internet bubble, and millions of shareholders lost billions of dollars when that bubble popped. The stock became hated as people who threw money at the stock when the valuation was foolish paid the price when sanity returned. The collapse in the share price of Cisco did not signal that it had become a bad business — it was simply vastly overvalued by the market.
Today, Cisco Systems, Inc. (NASDAQ:CSCO) is still a great business and now it carries a very reasonable and safe valuation. Its current price is in line with its projected five-year earnings growth rate of 9.9%, and it’s paying a very sustainable dividend yielding 3.3%. Cisco should be positioned to provide investors today with a reasonable expectation of 12% to 13% annualized returns for years to come.
After more than 10 years of turmoil and negative price performance, many of the major technology companies have successfully made the transition from hyper-growth to value based businesses. Shareholders who owned the shares during this transition period have suffered a great deal of pain. Shrewd investors today should remember that the old adage, “no pain, no gain” contains no specified requirement that the pain must be felt by the gainer. Therefore, while we should have no desire for others to make bad investments, we should feel no remorse if we profit from them. Shares of Microsoft Corporation (NASDAQ:MSFT), Cisco Systems, Inc. (NASDAQ:CSCO) and especially Apple Inc. (NASDAQ:AAPL) offer us that opportunity today.
Ken McGaha owns shares of Microsoft. The Motley Fool recommends Apple and Cisco Systems. The Motley Fool owns shares of Apple and Microsoft.