MENU

A change of heart on Apple

The Prosocial Portfolio I manage for Fool.com is designed to include companies with socially responsible tendencies, and definitely screen out those with antisocial ones. For a long while, I didn’t think Apple (NASDAQ: AAPL) quite belonged in the portfolio.

I’ve had a change of heart. Given Apple’s sharp drop in price, signs of management’s increasing awareness of more positive ways of doing business, and the rock-bottom investor sentiment, I’m giving this stock a chance and starting a position.

The business
Does anyone not know about Apple? The Cupertino company founded by the late Steve Jobs started off as a cultish niche player that was never expected to put much of a dent in the Microsoft-dominated (NASDAQ: MSFT) computing space. Its Macs may have put the fun, simplicity, and beauty into the home computing experience, but for many, they were viewed as too expensive compared to run-of-the-mill PCs.

Today, the Mac and Apple brands command respect, and Apple offers a device for all kinds of needs. The iPod paved the way for the ubiquity of the Apple brand, and the iPhone and iPad have also found their ways into consumers’ hearts (and daily lives).

Why I’m buying
Not long ago, Apple shares soared to outrageous highs, and the company even pushed past ExxonMobil as America’s largest by market capitalization. For those following financial news, every headline screamed Apple. In fact, it almost seemed as if Apple was the only stock any portfolio should hold.

Today, the sentiment has drastically swung to the opposite direction. The stock has lost nearly half its value from its highs, and it seems as if almost everyone has soured on Apple’s future prospects.

This is a perfect opportunity to buy shares. Apple’s forward price-to-earnings ratio has dropped to eight times forward earnings, and its PEG ratio is a mere 0.43, signaling an extremely undervalued stock.

Microsoft’s trading at 10 times forward earnings, with a PEG ratio of 1.21. Apple is cheaper, and Microsoft’s cutting edge dulled a long time ago compared with Apple’s stable of products. In other words, Apple’s growth isn’t going to stall that badly, making it a far better deal than its former rival.

Amazon.com (NASDAQ: AMZN), another company in my portfolio, is currently trading at 73 times forward earnings, with a PEG ratio of 4.68. As much as I believe that Amazon’s amazing grip on the consumer experience means it will continue to deliver searing growth, Apple’s obviously dirt cheap by comparison.

Google (NASDAQ: GOOG) is trading at 15 times forward earnings, with a PEG ratio of 1.1. Again, Google has plenty of growth drivers — some of which involve competing with Apple’s iPhone with Android, of course — but Apple’s simply a great company for an even cheaper price.

The risks
Of course, the negative sentiment right now doesn’t come from nowhere. Apple’s blazing growth is showing signs of slowing, and many are worried that it won’t be able to deliver the same high profit margins that it did in the past.

Apple’s new leader, Tim Cook, is probably not the visionary that Steve Jobs once was. Who could fill those shoes, after all? Jobs had a knack for not only foreseeing products consumers want, but also convincing them that they wanted them. For example, take the iPod, a device to store and play gigabytes of music and media in their pockets — there was a time when no one thought they even needed such things, but now it’s simply assumed.

From the point of view of including this stock in the Prosocial Portfolio, I fretted about worker treatment after controversies like the conditions at Foxconn, and what appears to be a lower concern for environmental factors. For example, IBM and Hewlett-Packard may not be at the top of the heap of my investment watch list, but they tend to top lists of green companies.

However, in the last year Apple has seemed to be making progress in more prosocial ways of doing business. It has made moves to work on supplier issues like the ones at Foxconn factories, and to be more transparent than it was in the past.

In addition, Apple’s announcement that it will bring some Mac manufacturing back to America is a great step toward bringing more jobs home to the US, where we desperately need them.

Recent photos of Apple’s massive solar array to power its North Carolina data center also give me a positive feeling about Apple’s stance on renewable energy. In fact, it vows to power every Apple facility with 100% renewable energy, and in 2012, it reached 75%, a 114% increase over 2010 levels.

That’s also because it can work on issues like these. Apple has the means to do many positive things with its business. Its huge cash hoard currently stands at about $137 billion and it has no debt. That’s one heck of a balance sheet, and it gives it leeway for many things, including building an internal way of doing business that matches the beauty of its products.

The Foolish bottom line
Apple is being treated like a lost company with a tarnished brand. That’s the mistake investors often make when they allow negative sentiment to poison their view of a company’s actual prospects. It can be hard to know the difference with some companies, but in this case, it’s a no-brainer.

I wouldn’t have bought Apple at its highs given my concerns. And when it comes to investors’ current concerns, those existed when the stock was at its highs, so it’s a better buy now than it was then.

Apple is still incredibly profitable and maintains an everyday presence in many Americans’ lives. And of course, it possesses one of the best, most-loved brands in the world. Investor sentiment may have soured, but consumer sentiment is actually worth a lot when it comes to positive investments.

Not an Apple believer? There are plenty of other great investments for your portfolio. The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading

The Motley Fool’s purpose is to help the world invest, better. Click here for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Alyce Lomax, originally appeared on fool.com.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.