Is Apple a Buy or Are the Haters Right?

NEW YORK (TheStreet) -- There's been a tug-of-war with shares of Apple (AAPL) in 2014. At $529, it is down nearly 6% for the year to date while up over 30% for the past 52 weeks.

Still, Apple's stock has lost some of its luster and the company is no longer the most talked about name in finance. That focus has shifted to Alibaba, social media stocks and whatever is the hot topic of the week.

So what's wrong with Apple? It has one of the strongest balance sheets in the world, industry-leading margins and substantial market share, yet the stock still trades at a discount to the broader market.

Consider the valuation of the Dow Jones Industrial Average, S&P 500, and Nasdaq 100 compared to Apple:

Surprisingly, Apple still grew sales 9.25% in fiscal 2013 and expectations are for the company to grow revenue 5.8% in the current fiscal year. 

While there are concerns about over-saturation in the smartphone market, analysts and Apple fans are hoping the company will have several new products on the way to diversify its dependency on iPhone sales. I'm not fully convinced wearable technology will take hold, or that Apple will be able to create another market out of thin air as it did with the iPad. 

My issue with Apple isn't the growth or product headwinds, although these are concerns. By buying shares of Apple, I recognize that its growth may remain very limited for quite some time. But its cash hoard, balance sheet and share buyback program make it more comforting to be a shareholder. 

However, I do have one issue with the stock: The valuation!

Every investor seems to be pointing out the rotation out of high-flying momentum stocks and into low-valuation, large-cap technology stocks. 

All the low-valuation, large-cap technology stocks, that is, except for Apple. 

With respect to its expected growth, the stock refuses to trade with a higher valuation. Forget trading at a discount to the broader indices, Apple trades a discount to its peers. Here's a look: 

Sorted by forward-looking P/E valuations, Apple is the third "cheapest" stock. By trailing P/E valuation, Apple is the second cheapest stock. Don't even look at its PEG ratio because Apple is ridiculously cheaper than the other companies by this standard.



The valuation becomes truly discounted when considering the expected EPS and revenue growth for fiscal 2014:

Three of the companies -- Hewlett-Packard (HPQ), Intel (INTC) and Cisco (CSCO) -- are expected to have less than 1% revenue growth, while only Apple and Oracle (ORCL) are expected to grow earnings per share by greater than 5%. 

No company is expected to grow sales and earnings 5% or more in fiscal 2014 -- except Apple. 

Not only does Apple trade at a discount to most of these companies, it is expected to grow more than them and has a stronger balance sheet. 

But, but, but...


All of the other companies have catalysts. That's why they should trade with a higher valuation. Or so we hear. 

Microsoft, Cisco, Oracle and Hewlett-Packard are making their way into the cloud business. Yes, all of these large-cap tech names are racing into, and spending billions on, what is becoming a commoditized business. 

But Intel will have chips in wearable devices! Yes, it can be a chip leader in a market segment that doesn't exist while supplying chips to a PC business that has bottomed -- or so we're told. 

Of course, bulls can argue the same for Apple: It's going to make the iWatch, iTV and other cool products we don't even know about! It'll have payments! But who knows if these products will even exist, let alone be successful?

I'm not saying that Apple should be trading at the same valuation as the Nasdaq 100. I'm not even saying it should trade at a comparable valuation to the S&P 500. 

Compared to its peers, Apple mostly trades at a discount, has superior growth and the strongest balance sheet. Based on this year's expectations Apple is expected to grow earnings and revenue 84% and 38% more, respectively, than its peers' average EPS and revenue growth expectations. 

I can understand the argument that Apple should trade at a discount to the broader market because it has slow growth. However, if anything, it should trade a premium -- not at a discount or in line -- to the large-cap tech names listed above because it has superior growth and stronger financials.

For prospective buyers: Know what you're getting yourself into. Apple is a stock that people love to hate. 

It trades at a ridiculously low valuation because the company refuses to succumb to Wall Street's whims. You essentially get an extremely low-valued stock and a solid buyback program and dividend, with potential growth as the kicker.

Without any game-changing products the stock will muddle along, drift higher over time and continue to be a cash cow. 

Witha new product, however, Apple should experience multiple expansion and be worth much more than it's valued at today. Only time will tell, but the risk-to-reward in this one sets up nicely for a longer-term hold. 

At the time of publication, Kenwell was long shares of Apple. 

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Bret Kenwell currently writes, blogs and also contributes to Robert Weinstein's Weekly Options Newsletter.

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