March 3, 2013 in Business

Despite Apple’s alarming slide, potential continues to hold sway

Universal Uclick
 
Associated Press photo

Customers wait outside the Apple Store in Munich before the start of sales of the iPad2 in August 2011.
(Full-size photo)

With shares of Apple (Nasdaq: AAPL) down about 15 percent in 2013 and more than 30 percent below their all-time high in September, many investors are wondering whether it’s best to get in or get out of the stock.

There’s a lot to like about the company. It has more than $100 billion in cash and cash equivalents, and sports a dividend recently yielding 2.3 percent. Better still, all those billions represent potential. With them, the company can boost its dividend, buy back lots of shares or otherwise invest in the company, such as by buying smaller firms. (Of course, much of its cash is abroad, and bringing it stateside will trigger taxation.)

Also appealing are net profit margins above 20 percent, and the stock’s seemingly low valuation, with a recent price-to-earnings ratio of about 11 and analysts expecting annual growth of 19 percent over the coming five years.

Look before you leap, though. That projected growth rate is far lower than Apple’s growth rate in recent years. Apple has been incredibly innovative, introducing new categories of products, but it may not be able to keep doing so. And it has recently dropped prices on some of its offerings, which will shrink its profit margins. (The Motley Fool owns shares of Apple and its newsletters have recommended it.)

Ask the Fool

Q: Might a company that rakes in a lot of money still be a bad investment? – L.D., Worcester, Mass.

A: It’s possible. Remember that the money a company takes in (its revenue, or sales) is its top line. Before you get to its bottom line of profits, you have to take out expenses, such as salaries, supplies and taxes. It’s critical to know how much (if anything) the company keeps as profit, and whether important numbers, such as sales and profits, are increasing.

Arch Coal, for example, has had average annual revenue growth of more than 12 percent over the past five years, and growth has accelerated. But its earnings have been uneven and recently entered negative territory.

That’s worrisome, but ailing companies can be good investments sometimes – if they turn themselves around. Study their financial reports, see if they’re gaining or losing market share, how strong their competitive advantages are, how much faith you have in their management and whether their futures seem promising.

Look for red flags such as major legal problems or investigations into accounting. Or just skip them and focus instead on profitable firms. Coal companies have struggled lately, in part due to low natural gas prices.

Q: What do the terms “bull” and “bear” mean? ñ H.H., Madison, Ind.

A: Someone is “bullish” if he expects a particular stock or the market to go up. A bear is pessimistic, expecting a drop. No one can know what the market will do in the short term, but its long-term trend has been up, so we’re long-term bulls. Over many decades, the stock market has averaged about 10 percent per year – despite market crashes, world wars and the Great Depression.

My dumbest investment

My dumbest investment was one of my first. In May 1996, I received $15,000 to invest from family overseas. I put the money into six different mutual funds for diversification. The largest chunk went into a “Giftrust” fund in my infant daughter’s name because it sounded “safe.” Over several years, the fund managed to safely lose the money at the rate of minus-4.2 percent per year – despite the fact that the fund was marketed as a safe way to gift money to the grandkids for college.

What makes a bad decision worse is that the money can’t be withdrawn, due to the unique nature of the fund. – B.T., Fort Worth, Texas

The Fool responds: A key lesson here is to be sure you understand the terms of your investments. Money invested through regular brokerage accounts remains accessible to you. Money invested in many retirement accounts such as IRAs is subject to specific withdrawal rules and likely penalties for early withdrawal. Your fund was likely an irrevocable trust. Stock investments aren’t the “safest” ones, but good ones tend to rise over long periods.

Get stories like this in a free daily email


Please keep it civil. Don't post comments that are obscene, defamatory, threatening, off-topic, an infringement of copyright or an invasion of privacy. Read our forum standards and community guidelines.

You must be logged in to post comments. Please log in here or click the comment box below for options.

comments powered by Disqus