Apple Inc. (AAPL): The Stock Picker’s Guide

LONDON — Successful investors use a disciplined approach to picking stocks, and checklists can be a great way to make sure you’ve covered all the bases.

In this series I’m subjecting companies to scrutiny under five headings: prospects, performance, management, safety, and valuation. How does Apple Inc. (NASDAQ:AAPL) measure up?

1. Prospects
The market for smartphones in the developed world is still growing, but the big opportunity is in emerging markets. By inventing novel products such as the iPad, Apple Inc. (NASDAQ:AAPL) has helped to create new markets.

Samsung is snapping at Apple Inc. (NASDAQ:AAPL)’s heels. In the fast-moving world of consumer technology, success and failure turn on product innovation, design, marketing and fashion.

An entrenched market position creates something of an economic moat, but one that can be breached by cash-rich raiders.

2. Performance
Apple can boast more than 10 years of rising sales, operating profit, and earnings per share.

Margins have also moved up over the past five years, and many companies could only envy Apple’s 2012 return on equity of 43%.

3. Management
Apple Inc. (NASDAQ:AAPL) has stumbled a couple of times since the loss of its founder, Steve Jobs, such as the ill-fated introduction of its own Maps app.

New CEO Tim Cook is not of such a creative bent himself, and it remains to be seen whether the company has sufficiently internalized a culture of innovation. The company looks in safe hands, but its prosperity lies in taking creative risks.

4. Safety
$140 billion of cash and no debt guarantees Apple Inc. (NASDAQ:AAPL)’s financial health. Its cash conversion is over 100%, so the cash pile keeps on growing.

That gives it a large room for maneuvering, and scope to sweeten investors with bigger dividends and share buybacks.

5. Valuation
Apple’s smooth profit progression hasn’t been matched by its share price. The shares are some 40% off their 12-month high.

That’s because Apple’s price-to-earnings ratio has declined as earnings have improved, from a multiple of 55 times in 2004 to 40 times in 2007 to 20 times in 2012. It’s now trading on a P/E of 9.5, half the S&P 500 (S&P Indices:.INX) average.

Apple bulls think the ratio has overshot. The projected yield of 2.6%, with masses of headroom for dividend increases, should offer some support.

Conclusion
It’s understandable why Apple Inc. (NASDAQ:AAPL) generates polarized views. It’s a bargain if it can continue to deliver what it has in the past. But it’s at the top of a very fragile tree, without the inspirational leader who took it there.

There are safer growth stories. The Motley Fool has picked out one of them as its top growth share for 2013. This company’s industry has been transformed by the Internet, but it has adapted to the digital age so well that it’s thriving and paying increasing dividends.

The article The Stock Picker’s Guide to Apple originally appeared on Fool.com and is written by Tony Reading.

Fool contributor Tony Reading owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!