That's the question many investors have been asking themselves lately—and the way they've been treating Apple's stock amounts to a collective response of "yes."
Since briefly crossing the $700 mark last fall, shares of the Cupertino, Calif-based iGiant have been nearly cut in half, briefly falling below the $400 mark earlier this month. Slowing sales growth, two straight quarters of declining earnings, and questions about the company's post-Steve Jobs leadership have all sent investors heading for the hills, thinking that Apple's best days are behind it.
I think they're probably right—and I'm still bullish on
To duplicate such a run would be about as close to impossible as you can get—unless you see Apple taking in $4.25 trillion in sales a decade from now. That's what another 25-fold sales jump would mean.
The next company that posts phenomenal growth with a pristine balance sheet and never has a hiccup or slowdown will be the first. Frankly, that's just not how things work. Good companies go through short-term problems. Sometimes, they get so big that they just can't keep growing at the same pace—Warren Buffett has told
Mutual fund legend Peter Lynch talked about this in his classic book, One Up On Wall Street. Lynch is known for his affinity for high-growth stocks, but in his writings he focused mostly on what he called "stalwarts"—mid- to large-sized companies with moderate growth and good valuations. One big reason: Fast-growers eventually become stalwarts. Wal-Mart is one great example.
Because investors tend to be so myopic, they often don't acknowledge that natural transition. They see slowing or declining growth as a sign that a company is headed for doom, and they sell shares in what may still be very good businesses—even if they are attractively priced. I think that's what's going on with Apple right now.
Sure, the company has challenges ahead. But it has so many positives going for it. Even with the past two quarters of disappointing earnings, it still has a trailing 12-month return on equity of 33%—versus an average of -16% for the computer hardware industry. Its profit margins over the same period have been 23%, versus zero for the industry average. It still has no debt, and has nearly $40 billion in cash sitting on its balance sheet. And now it's even paying a 3% dividend.
Despite all of those positives, Apple is trading for only about 10 times trailing 12-month earnings. (Earnings could be cut by a third over the next 12 months, and shares would still be at a 15 multiple). Its more than reasonable price is a big reason that some of my Guru Strategies (each of which is based on the approach of a different investing great) have interest in Apple right now.
My Joel Greenblatt-based model, for example, gives the stock an 80% grade, thanks to its 14.8% earnings yield and 35.9% return on capital. My Lynch-based model likes that it has a P/E-to-growth ratio of just 0.15, and gives it a 74% score. And my Buffett-based model likes Apple's high earnings yield, lack of debt, and long history of earnings growth. It give the stock a 70% score.
If Apple is indeed transitioning from being a fast-grower to a stalwart, it certainly wouldn't be the first. As I noted above, Wal-Mart is a great example. Here are four other former growth-stock darlings whose earnings aren't skyrocketing anymore, but which nonetheless remain solid companies with attractive shares. (As always, you should invest in stocks like these within the context of a broader, well diversified portfolio.)
But Gap has persevered, and is now posting decent 15% long-term growth (I use an average of the three-, four-, and five-year growth rates to determine a long-term rate). Its shares also are reasonably priced (about 16 times earnings, and 1.1 times sales).
My Lynch-based model is high on the $17-billion-market-cap retailer. Its moderate growth rate and high ($15.6 billion) annual sales make it a stalwart according to the Lynch approach. To find stocks selling on the cheap, Lynch famously used the P/E-to-Growth ratio, adjusting the "growth" portion of the equation to include yield for stalwarts, since they often pay solid dividends; yield-adjusted P/E/Gs below 1.0 are signs of value. When we divide Gap's 15.8 P/E by the sum of its growth rate and yield (1.6%), we get a yield-adjusted P/E/G of 0.95 -- a good sign.
Middleby isn't posting staggering growth numbers anymore, but it has turned into a very solid, reliable growth play, with long-term EPS growth of 19% and long-term revenue growth of 15%. Its steadiness—annual EPS have declined only once in the past decade—is one reason my Warren Buffett-based model likes the stock. It also likes that Middleby's debt ($258 million) is reasonable compared to its annual earnings ($123 million), and that the firm has averaged a return on equity of nearly 25% over the past decade. One more reason: Middleby's stellar $6.49 in free cash flow per share.
Medtronic still offers quite a bit though. It has grown EPS at about a 14% clip over the long term, and trades for 14.4 times earnings. It also has averaged a 20.2% return on equity over the past decade, is producing $2.78 in free cash flow per share, and has a reasonable 64% debt/equity ratio. My Lynch-based model likes its 0.91 yield-adjusted PEG (which includes a 2.2% dividend yield), while my Buffett-based model likes its free cash flow, solid earnings, and high ROE.
Disclosure: I'm long WDC.
More From Forbes:
