Apple's Profits May Be its Biggest Problem

NEW YORK (TheStreet) -- Apple (AAPL), IBM (IBM)Oracle (ORCL), Intel (INTC) and Qualcomm (QCOM) could drive the tech sector's profitability to new records by year-end. Unfortunately, those firms could also be the cause of the sector's overall under-performance this year.

The scenario of rising profits and stagnant stock prices at many of the tech sector's blue-chip firms may underscore a new question throughout the industry: do profits matter?

Apple, with its nearly $40 billion in trailing 12-month net income, is the most profitable company in the tech sector. It also is the fifth worst performing stock in the industry this year, according to a screen of Bloomberg data.

It should be no surprise that Apple is one of the cheapest tech sector stocks by almost any valuation metric and has attracted the interest of activist investors such as Carl Icahn and value-oriented investors like David Einhorn of Greenlight Capital Management and Bill Miller of Legg Mason.

Many Apple investors look at the company's underlying profitability and proclaim that it is a "screaming buy," as Bill Miller did last week on CNBC. Apple is even one of the industry's best dividend payers, with an annual yield of approximately 2.5%.

But what if consistent and easy to understand profits and dividend yields are part of the problem for Apple's under-performing shares?

Investors may simply have too many tangible ways to value Apple, whether it is the company's impressive net income, cash flow, operating margin or dividend payout. That contrasts with far better performing tech sector stocks such as Facebook (FB), Amazon (AMZN), Netflix (NFLX) and LinkedIn (LNKD), who all have posted strong 2013 stock gains in spite of their razor thin profitability, or in some cases, losses.

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