|TheStreet.com, Winter, 2014. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
Apple (AAPL) shareholders have been through somewhat of a roller coaster ride over the past few years.
After a meteoric rise to just over $700 a share (pre-split) in September 2012 — with many analysts at the time forecasting a share price above $800 — investors saw shares tumble to below $400. The death of the company’s iconic leader Steve Jobs and speculation that Apple lost some of its swagger and cool factor caused many investors to question if the company’s best days were behind it.
Despite those fears, sales, revenue and innovation all continued to forge ahead. After introducing a dividend payment, announcing a seven for one stock split, and raising its dividend, Apple shares are at their highest level ever.
So what is ahead for Apple? Can investors expect shares to rise further, or is it time to take some chips off the table?
In other words, though Apple shares are no longer cheap, is it fair to deem them overvalued? The answer is probably not.
The trailing price-to-earnings ratio for Apple is about 18, and the consensus estimate is that earnings will grow by 20% in 2015 and more than 30% annually over the next three years.
Generally speaking, an earnings growth rate that is greater than the P/E ratio indicates a reasonable or attractive current valuation. This puts the pressure squarely on future earnings, which are being underestimated.
Investors will be closely watching how Apple more aggressively incorporates its Beats Music division into its sales process.
Beats Music is the digital music library subscription service that has tremendous potential and high margins. This integration and capitalization of the strong brand image should help drive earnings above analyst’s expectations.
Separately, based on expectations of a choppier market next year, investors will focus their attention on large-cap, high-quality dividend paying stocks.
Apple stock always makes headlines, and if the company raises its dividend, it is likely to gain new admirers from investors who are seeking a combination of growth and a reliable rising dividend income stream.
For now, staying with Apple is the smart move.
At the time of publication, the author held no positions in any of the stocks mentioned.