Here's why I added Apple Inc. (NASDAQ:AAPL) to my portfolio last week.
I made a double exception when I invested into Apple (NASDAQ: AAPL.US) last week.
I generally avoid investing in technology stocks. The fickle nature of consumer demand for the latest gadgets -- with much of it coming from people less than half my age -- makes it hard to pick winners from losers. And winners can quickly become losers: Research in Motion, Nokia, Palm, Psion to name just a few.
I also rarely invest directly in US stocks. The process is straightforward but they're just that bit more complicated to analyse and keep track of.
What were the compelling reasons to make me break my normal rules?
1. Valuation
Okay, so this is putting the cart before the horse. Price alone is never a good reason to buy a stock. "Better to buy a great company at a fair price than a fair company at a great price" to quote super-investor Warren Buffett.
But Apple's recent well-publicised share price decline provides a good entry point. The stock dropped 10% after quarterly results revealed 'only' 18% revenue growth and margins slightly below expectations, pulling the price down by more than a third from its September high.
It's now trading on a price-to-earnings (P/E) ratio of 10, barely more than half the S&P 500 average of 19. Strip out its vast $140bn cash mountain and the P/E is more like 7.
2. Market position
Apple has a great market position in a growth industry. Though saturation must come eventually to developed markets, there's huge untapped demand in emerging markets. Technology research firm Gartner expects the smartphone market to double from 2011 to 2014.
Bears fear cheaper local products will cannibalise sales in the Chinese and Indian markets. But the big Apple is an iconic Western brand, and I think the success of prestigious fashion brands like Burberry is a better pointer to how things will play in China.
Apple's distinctive approach of synthesising hardware and software to make an easy and rewarding user experience has bought it a loyal fan base. And there's some stickiness from locking users into services such as iTunes and iCloud.
3. Innovation
Apple's excitement has always come from its ability to break the mould and re-invent the market place. That kind of thinking is embedded in the DNA of the company -- surviving inspirational CEO Steve Jobs, and protected by the legacy products that deliver abundant cash flow.
Apple fans predict that the company's next target will be the household TV. Tech ignoramuses like me just see a speculative upside in the possibility that the company may yet again disrupt existing providers' technology -- while being aware of the risk its own business gets disrupted by an upstart innovator.
4. Currency
There's a game of competitive devaluation going on in the world. My hunch is that this is one game the UK will win, with its faltering not-really-austerity economic policies, are-we-in-are-we-out-the-EU politics, and a more inflation-tolerant Bank of England Governor. At least, if the global economy turns sour, the dollar will regain/retain its safe-haven status. So I'm happy to hold dollar-based investments, and sneakily think that might just boost my returns this year.
Growth
To my mind, it's premature to write off Apple as a stock that has gone ex-growth and treat it as an income share, which is what its current valuation implies. But its prodigious cash flow and dormant cash mountain could sustain increases in its modest dividend payout (around 2.5%) for some years, providing downside protection to the share price.
Innovation made it an all-time great growth stock, with the share price increasing by over 200 times from $3.28 to $700 from 2003 to 2012. That sort of growth can make you seriously rich. Apple won't repeat that experience but I don't think the story is over yet.
I'd like to tell you about another growth stock, much closer to home. The industry that this company operates in has been turned upside down by the internet, but it has adapted to the digital age so well that it's thriving, paying increasing dividends from its strong cash generation. You'd recognise the company's name, but you probably don't realise just how much its business model has changed.
The Motley Fool has picked this company as its top growth share for 2013. Not only has it great growth prospects, but a sum-of-the-parts valuation suggests there could be considerable value that isn't reflected in the share price. To discover the identity of this company, you can download a free in-depth report just by clicking here.
> Tony owns shares in Apple but no other shares mentioned in this article. The Motley Fool owns shares in Apple, and has recommended shares in Burberry.
