Is It Safe? H-P Outshines Apple

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Without personal computers, communication and productivity would grind to a halt.

But even with the massive size of the computer market, there are still few choices for consumers, as the top four manufacturers, Hewlett-Packard(HPQ Quote), Dell(DELL Quote), Acer and Apple(AAPL Quote), combine for 72% of sales, according to market-research firm IDC.

Investors have an even smaller selection, as Acer is a Taiwanese company and difficult to trade.

The companies' share-price returns are all over the map. Apple is up 51% this year, and Dell has risen 8%. Hewlett-Packard has fallen 4%. So which is the safest investment when trying to hitch a ride on the personal-computer market?

Many would say Apple, as it's a trendy name to throw around. However, Hewlett-Packard is a better value, considering current prices. Among the biggest investors in Hewlett-Packard are managers of the Dodge & Cox Stock Fund(DODGX Quote), Fidelity Contrafund(FCNTX Quote) and JPMorgan Large Cap Core Plus Fund(JLCAX Quote).

The only black mark is return on equity. Hewlett-Packard's ROE of 21.5% lags behind Apple's 27.2% and Dell's 61.9%. Still, the average for computer and peripherals makers is 16%. Dell's massive outperformance can be explained by its reliance on leverage, which leads to a higher variability in earnings and, therefore, stock price.

With a capital structure more like Hewlett-Packard and Apple, Dell's ROE would drop to 19.9%.

When comparing Hewlett-Packard to Apple, the choice is cloudy. With strong earnings and a phenomenal array of products, Apple is attractive and certainly has advantages. A good question, though, when building a portfolio is: What exactly is this holding giving me exposure to? If an investor is looking to tap into home computing, Apple isn't the best bet.