Apple Reimagined as a Value Stock

 | Apr 02, 2014 | 12:43 PM EDT
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Suddenly, all the analysts want their recommendations to appear as value stocks. This morning, we heard an impassioned plea from a very good analyst that Apple (AAPL) is an underappreciated value stock.

The recipe for a value stock? It has to have valuation below the average stock in the S&P 500. Apple certainly has that, using standard price-to-earnings metrics. It sells at about 12x earnings, while the average stock trades at 17.3x earnings. It has a new product coming out, the iPhone 6, that the analyst, the influential Gene Munster, who opines on Apple from his perch at Piper Jaffray, says is being underestimated. Munster points out that while Apple hasn't had great earnings momentum, he sees the company earning a huge $43 a share this calendar year, which is up nicely from $40 last year, and you can expect a modest dividend boost as well as an increase in the buyback

Bu the most important thing about this recommendation is that Munster is asserting that if they are taking up a lot of other value stocks, and that has been the case, then Apple should fit into that category too and deserves a higher valuation.

Frankly, when you think of it, this is a shocking turn of events. We have often considered Apple one of the great growth stocks of our time, with ever-increasing earnings. But its earnings growth is not keeping pace with the rest of the high-growth techs, and it has failed to blow us away with a must-have product. Instead, there are all of these little products that produce a modicum amount of excitement but aren't necessarily blowing away the competition as it used to before an aggressive Samsung, armed with a snazzy Android operating system, took it on.

Now, in the last few weeks, we have seen a love affair with what can only be called old tech. Hewlett-Packard (HPQ), for example, has had declining sales for some time. But it is up 18% for the year. Oracle (ORCL), which missed its quarterly estimate badly when it reported recently, has rallied 8% and is up very nicely from the miss. Microsoft (MSFT) has had a remarkable move just on a change in leadership that may or may not change the economy. IBM (IBM), which my charitable trust has been buying, has reported multiple weak quarters, the last one being the weakest, but the stock has moved up 20 straight points since that debacle and is now up 3% for the year. That's despite IBM actually showing a decline in revenue, something no one expects will happen to Apple when it reports sales.

Meanwhile, Apple is actually down 3% for the year despite its balance sheet and earnings profile, which are superior to just about every single one of these companies.

So, if Apple can't be sold as a growth stock, the thinking goes, why don't we just call it a value play and have it taken up by those who keep bidding up value?

Of course, the secret behind the value push is that the economy is supposed to be getting better, and these other companies that are doing just so-so could see a dramatic pick-up in business if we get worldwide growth again. These are companies that have cut back staff or reorganized or become lean enough that any uptick in sales will produce tremendous earnings leverage.

Apple? It's not clear how much a stronger economy will really help its sales. Maybe Apple's real problem is that it isn't perceived as a growth stock, on the basis of fancy new products, and it isn't considered a value stock, because we think of value in conjunction with an explosion in earnings if things get better. It's in purgatory. And perhaps that's where it will stay until it can show that if the economy gets better, earnings will accelerate, or if it reveals a product that can actually move the needle. Purgatory doesn't mean it can hurt you. But that's always a subpar reason to buy a stock.

One good thing? The fall will be cushioned by value status if you get a miss in earnings. It worked for IBM and Oracle. It can work for Apple, too.



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