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4 Ways to Profit When Apple Hits $725 - views
It’s no surprise that the Cupertino, California-based firm gets as much attention as it does. As the biggest company in the world, nearly everyone owns Apple, either directly or indirectly. According to data from Morningstar, around 84% of large-growth mutual funds own shares of the tech behemoth, and so do countless hedge fund managers and retail investors. Admittedly, Apple is a crowded trade.
But the trade is crowded for a reason: Apple’s current $564 price is a bargain.
Today, I want to show you four ways that you can profit from $700 Apple -- including a few that everyone isn’t piling into right now.
We’ll start at the source, Apple itself.
For starters, Apple is flush with cash. At last count, the firm’s balance sheet held more than $110 billion in cash and investments, a huge load of money that the firm frankly doesn’t have use for. But for analysts, that massive cash load is a godsend; it makes valuing a huge firm like Apple a whole lot easier. So, what impact does Apple’s cash reserve have on its value?
Well, it means that a full 21% of Apple’s mammoth $527 billion market cap is made up of cold hard cash. Adjusting metrics like price-to-earnings ratio that cash stash provides some telling stats -- with cash taken out of Apple’s price-to-earnings calculation, the firm is only trading for 10.8 times earnings in the trailing 12 months, hardly the sort of multiple you’d expect to see from a firm that’s growing at Apple’s pace. Multiplying those earnings by the sorts of (still sub-20) P/Es seen at other tech industry growth stories yields a target price closer to $725 right now.
And that cash is even more significant now that Apple has announced a dividend payout and a large-scale share buyback program; the moves will actually start returning value directly to shareholders in 2012.
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That’s not going to shake the discount out of Apple’s shares immediately -- there are still a couple of factors that are scaring investors away from shares of this firm.
The first is Apple’s earnings growth capacity. I mean, how much more could Apple grow at this point? But to folks who’ve been watching Apple for a while now, that should sound like a familiar challenge to Apple’s earnings power.
Historically, the firm has been prescient at transforming its business just enough to capture major trends in the technology world. Even without Steve Jobs at the helm, some impressive products are coming out of Cupertino right now.
The kickoff of Apple’s Worldwide Developer’s Conference next week could pull back the curtain on a vastly redesigned iOS 6, new Mac improvements, and maybe even a new iteration of the iPhone according to some Apple watchers. The event looks like a big potential catalyst for buyers to get excited about Apple again.
And for those who argue that Apple is a “fad stock,” so what if it is? A year or two ago, I was at a conference where Wellington Management fund manager Frank Teixeira was talking about a discussion he had with a colleague about Apple being a fad company.
“Who cares if Apple is a ‘fad’? I want to buy the fad companies!” he argued. Fad or not, Apple continues to turn out record-breaking sales and profits -- don’t eschew this stock for fad reasons alone.
The other factor working against Apple is its size. As the biggest publicly traded company in the world, Apple admittedly has a big target on its back. Many investors (professionals included) just have a psychological aversion to buying a “pricey” stock like Apple -- but that sort of logic completely ignores the value that AAPL currently offers.
Still, if Apple is too crowded for your taste, there are some unique smaller alternatives that can take advantage of its growth.
First up is glassmaker Corning (GLW). At first blush, a glass company doesn’t look like a way to take advantage of an Apple rally, but Corning is in a special position. This $19 billion firm manufactures the majority of the proprietary super-hard glass used for the iPhone. That glass, Gorilla Glass, recently got upgraded with a new iteration that’s thinner and stronger, and should generate bigger margins for Corning’s bottom line in 2012 as mobile device makers (not limited to Apple) buy as much of the glass as they can get their hands on.
There are a couple of reasons to like Corning as an Apple-driven play: its connection to Apple is hard to break, and it’s cheap. Because Gorilla Glass is a proprietary product, it’s not something that Apple can easily source elsewhere (Japan’s Asahi Glass makes a similar product for Apple, but Corning gets more business from Cupertino).
Corning currently trades for just 87% of book value -- in other words, if you dismantled the firm and sold off its assets at book value, the money each shareholder got would be more than the $12 and change that GLW currently trades for. Throw in a 2.45% dividend yield on top, and you’ve got a solid way to take advantage of upside in Apple. Corning’s other divisions (manufacturing glass for LCD displays, for instance) reduce some of the Apple-centric risk from this stock.
Qualcomm (QCOM) makes a solid way to play Apple growth for the same reasons as Corning. The firm develops chips for mobile devices and owns a vault filled with lucrative intellectual property. Because Qualcomm owns key 3G and 4G patents, the firm generates royalty revenue every time a phone is sold -- even if Qualcomm’s chips aren’t used. So bigger sales from an iPhone 5 in 2012 could stand to boost QCOM’s revenues this year, and because it’s royalty income, Apple can’t merely opt to switch vendors from QCOM.
But royalties aren’t Qualcomm’s whole business. Mobile chips are still the lion’s share of QCOM’s revenue; the firm’s offerings are critical components in phones such as the HTC Droid Incredible, the iPad and the iPhone. Qualcomm’s new Snapdragon processor stands to be the jewel in the firm’s crown, offering more processing power for OEMs and more revenues per chip for QCOM.
Snapdragon sales have more than doubled in the last year, a pace that should continue as new handset and tablet makers adopt the relatively new platform. Like Apple, Qualcomm has mountains of cash and investments on its balance sheet, nearly $27 billion at last count. That gives the firm a similar proportion of cash-to-value as Apple, and leaves ample room for QCOM to continue to hike its dividend payout in the coming quarters.
Last up is recent IPO Fusion-IO (FIO), a small-cap company that saw a material chunk of its revenue come from Apple in the latest quarter. Fusion-IO is in the computer storage business, offering solutions that increase the throughput of storage devices. That expertise has come in handy for Apple’s billion-dollar North Carolina datacenter. With the popularity of served content, the biggest bottleneck isn’t storage capacity anymore -- instead, it’s the speed at which we’re able to access data. As the popularity of cloud services, like Apple’s iCloud, continues to grow, so too should FIO’s revenue.
The firm has enjoyed fast-paced growth over the past several years, and a customer Rolodex that includes Apple is a major tailwind for shares of FIO, especially if demand for data on Apple’s servers exceeds expectations. While this is a more speculative play because of its size and IPO sympathy moves in 2012, it’s still a less direct way to harness Apple’s move up to $725 this year.
To see these names in action, check out the Apple-Driven Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.