$Stock*Shop*Charts*News*Option$

[EZ2]

Why Apple shares are ripe for picking

MARKETWATCH 7:53 AM ET 5/27/2016
Symbol Last Price Change
AAPL 100.41up 0 (0%)
BRK/A 214600down 0 (0%)
QUOTES AS OF 04:00:00 PM ET 05/26/2016

The bottom is in -- again -- for this much-maligned stock

Anyone considering an investment in Apple(AAPL) stock faces a challenge. The company is huge, its shares are volatile, and its moves are widely followed on Wall Street.

Yet still, this is a good time to buy shares of Apple(AAPL) .

In fact, you may already have a stake in the tech titan if you own a S&P 500 index fund. As a market-cap weighted index, the S&P's largest position is Apple(AAPL), with a market value of around $550 billion that is worth more than the 90 smallest S&P 500 components combined.

And for those who are bullish on this stock, it appears that once again, Apple(AAPL) has found a short-term bottom. The chartists (http://www.marketwatch.com/story/apples-stock-chart-suggests-a-short-term-bottom-may-be-in-place-2016-02-18) have been pleased with the stock's recent performance, the Wall Street analysts have issued upgrades (http:// www.marketwatch.com/story/apple-estimates-have-finally-bottomed-2016-03-30). Beyond that, here's what's working in favor of Apple(AAPL):

1. Bargain valuation: The forward price-to-earnings ratio of the S&P 500 is 17.5, and the forward P/E of the Nasdaq is 18.3. By comparison, Apple(AAPL) is trading for less than 11 times forward earnings at current pricing. That's not just cheaper than the market, it's cheaper than its peers; the forward P/E ratio for both Microsoft (MSFT) and Alphabet (GOOGL) is about 18.

2. Dividend and dividend-growth: A 2.3% yield isn't as sexy as a high-paying REIT, but Apple's(AAPL) dividend is essentially bulletproof at about 25% of next year's expected earnings -- and that's after a roughly 10% bump in its quarterly payout this year to 57 cents from 52 cents. Apple(AAPL) has been consistently raising its dividend, too, with distributions up about 50% since reinstating a roughly 38-cent payout (split-adjusted) in 2012. That suggests continued income potential going forward.

3. Buffett's billion-dollar bet: Sentiment matters on Wall Street, and recent news that Berkshire Hathaway Inc.(BRK/A) (BRKA) just plowed $1 billion (http://www.marketwatch.com/story/this-is-why-apple-is-a-classic-warren-buffett-value- investment-2016-05-16) into Apple(AAPL) stock is a big shot in the arm. That's in part because of the cult of Berkshire Chairman Warren Buffett, and the fact that investors tend to follow the big-name investor into stocks. But it's also because the methodology of Buffett & Co. -- that is, finding undervalued long-term investments that can outperform -- hints that the underlying fundamentals are favorable to new investors right now. And considering Berkshire bought in modestly higher at about $109 (http://money.cnn.com/2016/05/16/investing/warren-buffett-berkshire-hathaway-apple/) a share on average, investors who want to be like Buffett could be getting a good deal right now.

4. No news isn't bad news:Apple earnings in April (http://blogs.marketwatch.com/thetell/2016/04/26/apple-earnings- expected-to-show-first-iphone-sales-decline-live-blog/) were bad across almost every measure, with the company reporting its first-ever year-over-year decline in iPhone sales and indicating a slowdown in China, among other concerns. But those disappointments (http://www.marketwatch.com/story/apple-stock-could-be-due-for-long-grind-sideways-2016-05- 26)were expected by anyone who has been following the stock. And while it was admittedly tough to see that Apple's(AAPL) newest hardware offerings (http://www.marketwatch.com/story/apple-announces-iphone-se-97-inch-ipad-pro-lower-watch- prices-2016-03-21) are effectively retreads -- a cheaper iPhone SE and a revamped iPad Pro -- it is hardly news that Apple(AAPL) is lacking a next-generation gadget to follow up on its existing product line. So what is it that investors have suddenly discovered?

5. Software innovation, not hardware innovation: Apple(AAPL) isn't creating hoverboards or electric cars, but as I wrote several weeks ago (http://www.marketwatch.com/story/3-tech-stocks-to-ride-booming-new-media-trends-2016-05-02), it is diversifying beyond iPhones and iPads. Consider Apple's(AAPL) "Services" segment that includes iTunes, iBooks, and Apple Pay just tallied almost $6 billion (http://investor.apple.com/secfiling.cfm?filingID=1193125-16-559625&CIK=320193) in revenue in the latest quarter -- up 20% from the first-quarter of 2015, and making Services a bigger top-line business than either the iPad or Mac segments. In fact, Services is the second-largest segment for Apple(AAPL) behind only the iPhone unit, and good for almost 12% of total sales. Remember: Just because Apple(AAPL) isn't pushing out flashy new hardware doesn't mean it isn't creating new products and revenue streams.

6. Value is hot, growth is not: Apple(AAPL) isn't much of a growth play anymore. But a host of popular growth stocks have been in trouble lately regardless of strong top-line performance, including Netflix(NFLX) and Tesla (TSLA). Meanwhile, some seemingly "dead" names such as Wal-Mart Stores(WMT) and Exxon Mobil (XOM) have been on a tear recently -- proving that negativity was overblown, even with obvious challenges to their underlying businesses.

Objectively, those who shorted Apple(AAPL) or bought puts on the stock a few months ago made smart moves. But that doesn't mean that long-term or even medium-term investors should consider the stock perpetual fodder for the bears. Indeed, if you're investing for tax-efficient capital gains and long-term dividend growth potential, enjoy your Apple(AAPL).

-Jeff Reeves; 415-439-6400; [e-mail]


(END) Dow Jones Newswires
05-27-160753ET
Copyright (c) 2016 Dow Jones & Company, Inc.