Tuesday, April 5, 2011

Stock Idea: Apple Inc. (AAPL, $338.89)

(May 16, 2011 update: All future stock posts will appear on my new subscription-only website at www.GoodfellowLLC.com. Please visit!)

Apple Inc. (AAPL) is a dominant player in the technology industry, and has sales and profits which have been growing like crazy. Apple stock has been trading this year between $330 and $360. Is it overvalued or undervalued? We can't look at a stock price and know such a thing without looking at the numbers which help put it into perspective.

Apple has projected consensus earnings per share (EPS) growth of 51.55%, 15.55% and 12.17% for fiscal years 2011 through 2013. Wow! That tells us that Apple is a fast-growing company. But what does that tell us about the stock price?

We need to look at two more numbers now in order to put the stock price into perspective. Apple's projected EPS for 2011 is $22.96. That means for every share of outstanding stock, the company is expected to clear $22.96 profit in 2011. To find the price/earnings ratio (PE), we divide the stock price by the projected EPS: $338.89 divided by $22.96 is 14.74, which gives us a PE of approximately 15.

Generally speaking, a stock is more undervalued if the PE is below the EPS growth rate, and more overvalued if the PE is higher. In this case, the EPS growth rate is projected at 52% and the PE is 15. There's a huge disparity there, which points to Apple being a value stock.

"But wouldn't a $50 stock or a $20 stock with a PE of 15 and an EPS growth rate of 52% be cheaper and more likely to make me money?" No. ANY stock with a PE of 15 and an EPS growth rate of 52% has a similar valuation, and should theoretically rise or fall a similar amount, assuming other nuances are similar (such as debt levels, product development, etc.).

Short-term traders who would be happy with 6% profit could find a trading opportunity with Apple, and growth investors with a longer time horizon will likely do well also, barring any large stock market disruption.

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The Right Huff is Crista Huff's blog for politics and items of sociological or financial interest. Crista Huff also managesGoodfellow LLC, a subscription-only stock market website. We strive to identify financially healthy companies in which traders and investors can buy shares and earn dividends and capital gains. Seedisclaimer for the risks associated with investing in the stock market. See your tax advisor for the tax consequences of investing. See your estate planning attorney to clarify beneficiary and inheritance issues associated with your assets.

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