Is Apple the Perfect Growth Stock?
by Alexander Green, Chief Investment Strategist
Monday, July 19, 2010: Issue #1304
I’ve often said that my stock-picking approach can be boiled down to this mantra:
Share prices follow earnings.
I challenge you to look back through history and find even a single company that increased its earnings quarter after quarter, year after year, and the stock didn’t tag along.
By the same token, try to find a company whose earnings were flat or declining year after year and the shares kept rising. It doesn’t happen, even in a roaring bull market.
But is growth in earnings per share all you really need? Could it be that simple?
Of course not.
Any company can increase its earnings for a while merely by cutting expenses. But eventually, a firm reaches a point where it can’t cut costs further without damaging the underlying business. (Obviously, if you reach the point where you’re selling off key infrastructure or laying off top people to boost short-term profits, you’re hurting the company’s long-term prospects.)
There are other important factors as well and I can illustrate a few of them by pointing to a near-perfect growth stock…
Want to See If a Company is Growing? Look to These Three Crucial Factors
In order to see robust bottom-line growth, you need to see substantial top-line growth. In other words, sales have to rise, too.
And Apple, Inc. (Nasdaq: AAPL) is doing just that.
- Sales & Earnings: The company is selling boatloads of iPods, iMacs, iPhones and iPads. In many instances, it’s been unable to keep up with demand. In the most recent quarter, sales jumped 49%. That enabled earnings to soar 90%.
- Profit Margins: This is another important factor. If competitors can come in and easily underprice you, your business is vulnerable.
But Apple is well-protected with its iron-clad patents on the Mac operating system and many of the key features of its bestselling products. So it’s no surprise that operating margins top 29%. Or that Apple is up 63% over the last 52 weeks, even after the recent market dip.
Over time, Apple has brought down the price of most of its products, but not because competitors were forcing them down. Management did it because they wanted to broaden the potential market for Apple’s products. That’s key.
- Return on Equity: This key metric is calculated by dividing earnings per share by book value (or net assets) per share.
Why is this important? Because it tells you how efficiently management is deploying the firm’s capital. Warren Buffett – who puts a great deal of emphasis on ROE – says anything above 17% is good. Apple’s return on equity is twice that.
Happy Customers… Happy Shareholders
Apple has done plenty of other things right, too. It’s a consistent innovator and is a world-class marketer. (Its products are so cool, customers find themselves lusting over things they don’t even need.) And it’s done a good job of keeping a lid on costs.
The end result? Earnings per share have boomed over the last decade. And while the broad market has gone nowhere, shares of Apple are up several-fold.
It’s a classic story of a company that keeps its customers coming back because it makes them happy. And the resulting increase in earnings keeps shareholders delighted, too.
Good investing,
Alexander Green
Related Investment U Articles:
- Cytec Industries Inc.: Was Its Second-Quarter Jump a One-Time Fluke?
- Microsoft vs. Apple: 2012 and Beyond
- Growth in Net Earnings Per Share: The Only Thing That Matters
- Is Tech Worth What the Markets Are Paying?
- Is Apple Losing its Glossy Shine?
22 Responses to “Is Apple the Perfect Growth Stock?”
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Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
Customers are not too happy with the iPhone 4, and Apple, or at least Steve Jobs, seems to be in denial about any flaws.
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1.7 million in first 3 days and 3 million in first 3 weeks makes iPhone 4 the most successfull product in it’s history. according to internal data that apple released on friday, the is an antenna issue effecting some users in actual use. however, still the return rate is less than 1/3 of iPhone 3gs and the number of direct complaints about this issue is less than 1% of sales thus far. not saying their a no issues, but seems customers “overall” are very happy with their iPhone 4s
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@truthondata,
Either your math is very “off” or you’re from a different planet.
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I’m on my 4th iPhone and the latest one, the iPhone 4 works the best. The design, crystal clear screen, responsiveness are unlike any other phone in the world. They keep getting faster. Speed and responsiveness in a smartphone are critical because you are using it on the go. No other smartphone in the world gives you the choice of Applications and etertainment (music, videos, tv shows, books). And I’ve been testing them all. I used an Android phone the other day that a neighbor showed me and it crashed during his demo to me. Somehow or another, the iPhone anticipates what you need to do next and adjusts its Multi-Touch screen to make life on the go easier. I find that other phones don’t do this as well.
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I completely agree with you Apple is a great investment oppurtunity more so at this moment because of the dip.
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I’ve done well with Apple as a company and actually run my entire office with Apple products, including the iPad that my patients fill out on their arrival. It was an easy transition and they hand me the iPad as I enter the room. I have a sell order on 10,000 shares at 450$, which will represent a 310$ per share profit. Then, call me on the Gulf Coast.
On another front; I’m thinking about trying to adapt my car which runs on bio-diesel. Right now I’m getting 14 miles per oil-soaked pelican.
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“Customers are not too happy with the iPhone 4″
Yeah, too bad the demand and return rates don’t back such a claim.
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Apple and Jobs have to be one of the worlds, yes worlds, success stories and What a laugh you are Mr Smith, like saying the trees today are not as green as yesterday. Did you hear that on some TV program???
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Steve Jobs looking very frail lately. I remember what happened the last time he was not at the helm of Apple. I hate to think that whole company rests on his ability, but he is a very large part of its success. I took my profit and got out of AAPL.
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Now is the perfect time to buy APPL, the stock is gonna soar tomorrow after the earnings.
Everyone in my 20 person company bought an ipad in the span of 2 weeks. I’m not afraid about Apple.
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Point of terminology: “dividing earnings per share by book value (or net assets) per share” is known as “return on assets”, not “return on equity”.
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Know this for 9 months, selling coverd call(s) and selling put(s) when profitabls
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I hate to be the contrarian, but I’ll try to disconnect Apple’s stock price from its actual success as a company.
I see Apple reporting fine earnings, and the company will continue to do quite well in the near future. I love their products.
However, I think their stock is headed for a drop following earnings news. AAPL always falls prey to the “sell on news”, and I’m afraid this instance is no different. I wouldn’t be surprised to see it hit $220 before it hits $270 again.
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I’m OK with that, a 10% drop will get some of my put money back, and I’ll sell the 200 puts. That’s how I averaged in at $140, combined with selling calls.
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I don’t buy calls or puts. I don’t diversify. I put all my savings on AAPL in January of this year. So far I have earned 25% on my money. I don’t think any hedge fund managers can top me on the YTD return. Even if AAPL goes down in the 2nd half of the 2010 due to overblown antenna issue. I will outperform any other hedge funds. You need to have faith on AAPL like I am. It’s an extraordinary growth company. The potential of sales expansion from oversea is going to support its growth in addition to its innovation of new products.
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Watch the slingshot effect after Tuesday’s earning’s report.
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Everybody loves apple, the perfect stock. Pull up a chart of JDSU uniphase from 2000, that was the last stock standing because we would always need storage. There are way too many people on the Apple train, it will get derailed thay all do eventually.wait until they all try and squeeze out that door at the same time
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Be very careful of the Google operation systems coming out at the end of the year, and earlier– no open source sharing is what killed Apple, early on–Remember $14.25 per share?? They pulled it out, later, , with great tech and aplomn— But many people got killed on Apple stock for a few years…This time, there is too much money, too many companies, too many technogeeks, to go against all of the Apple innovations. I hold Apple stock, but will be paring back after October, before the new electronic sales and innovations–My two cents!! mac
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Yes I can show you a stock that has steadily increased earnings (sunstantially) over last decade but its share price has been flat – WMT.
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Hi,
I have been reading your articles and others and thinking the same way that before the end of this year AAPL should hit $300, bought stock around $271 about a couple of weeks. Since then the stock has been going down almost every day. Where did we go wrong?
Please comment.
Thank you.
Vince
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Alexander Green, Chief Investment Strategist
Monday, July 19, 2010: Issue #1304 ……couldn’t have been stated better !!! lexy
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Really good facts written in this article. Apple stocks are soaring, and will continue to do so.
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