A Good Time to Pick Apple

 | Jul 01, 2014 | 2:00 PM EDT  | Comments
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Apple's late CEO, Steve Jobs, was reportedly a big music fan. Current CEO, Tim Cook, does not have such a reputation, but he still seems to get the beat -- witness Apple's (AAPL) recent announcement that it will purchase Beats by Dr. Dre for $3 billion.

Beats has a highly successful headphone line, thus providing a potential entrée into wearable technology. It also offers a streaming music service whereby music fans access music from the cloud. And it has two established and well-connected music industry insiders as its founders (and now employees of Apple): Jimmy Iovine and Dr. Dre (whose real name is Andre Young).

While Cook lacks Jobs' charisma, he may well make up for this shortcoming with purchases like Beats. Much has been written about how Apple lacks an exciting new product to add to its string of megahits that include the iPod, iPhone and iPad. But it is hard to argue with the company's success.

And Apple is a success. It has a loyal following. It has created an ecosystem (operating system, app store, hardware and services) that makes it difficult (but not impossible) for users to switch to, say, Android. Its cash hoard is a hard-to-fathom $160 billion. China recently became an available market for the iPhone, meaning we may see millions of Chinese walking around the country's fast-expanding cities with iPhones to their ears. And just recently, to make its shares more affordable to the typical investor, the company instituted a 7-to-1 stock split.

Apple has a great deal going for it, which is why you need to consider it for your portfolio. I choose stocks not primarily by looking at their markets or products or management, but by following my guru strategies. Created to duplicate the methods great investors use choose stocks, these strategies have proven -- in more than a decade since I computerized them -- adept at finding value among stocks that my readers can capitalize on.

One of my strategies, based on the trading philosophy of Peter Lynch, gives Apple its highest rating. The P/E/G ratio (price-to-earnings relative to growth) is this strategy's most important variable. It measures how much the investor is paying for growth, which cannot be higher than 1.0 to earn the strategy's best rating. A P/E/G of 0.50 is considered especially desirable, as the lower the P/E/G, the less one is paying for growth. Apple is in this very favorable range, with a P/E/G of 0.37. Judging by the Lynch strategy, this stock is dirt-cheap.

My Warren Buffett-based strategy does not accord Apple its top rating because it has issues with the company's return on equity and return on total capital. A low ROE and RTC 10 years ago account for why the strategy does not give Apple its highest rating. Next year, when the one low-performing year drops off the screen because it will no longer be among the last 10 years' results, I would not be surprised to see the Buffett strategy grant high marks to Apple. But this strategy makes a prediction about Apple that should appeal to virtually every investor: It expects Apple's stock to produce an average annual return to investors of 15.8% based on its current price of about $93. Hard to argue with that.

Apple is among the world's most admired and high performing companies, with a reasonably priced stock and a market with good growth potential. Even if you prefer Android devices, give Apple's stock a fair chance.

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