How to Choose a Great Stock

What if you could find a stock that was exciting for both value and growth investors?  Can there be such a company?

A value investor would want to find a sound balance sheet, a strong return on invested equity, and sound prospects for the future.

The growth investor would pay attention to earnings growth, the P/E multiple, and future growth prospects.

A Company to Consider

One of my five investment programs focuses specifically on Great Stocks –  great companies, great management, great prices.  It has been my most successful program, beating the S&P 500 nicely over more than ten years.  When it trails, it is usually because the market is "selling winners."

Occasionaly I write about one of our selections.

Using my criteria, please consider the following facts:

  • Stock price — about $35.
  • Cash and marketable securities — $6.50 per share.
  • No debt.
  • EPS of $2.70
  • Earnings growth of about 60% every year for the last three years.
  • A broad product line, with massive demand for the newest entry.

This is a stock that is exciting in terms of both value and growth.

Hiding in Plain Sight

Why does this value persist?

I think there are two reasons.

  1. In a long-term success story the stock price runs higher.  Just like the current market, people think they have missed out.  This means they will never get on board.
  2. There is intense skepticism about continuing growth and many rumors.

And the Mystery Stock is….. Apple

Astute readers may have noticed that the facts fit the Apple (AAPL) story.  All of the numbers have been divided by ten.

Last February I wrote a similar article, suggesting that most people incorrectly focused on the absolute stock price rather than the underlying fundamentals.  I suggested that readers should divide everything by ten, pretending that Apple did a 10-1 stock split.

I strongly recommend that readers go back to the old article and compare it to the current situation.  It is not that I am predicting a 10-1 split (but I would not be surprised).  Instead, I suggest that people think about individual stocks and the market as a whole in terms of earnings and growth, not using absolute price.  The price makes you think you have missed out.

Every day is a new one for investors.  Look ahead!

The Current Apple Debate

There are some current articles about Apple and the huge cash accumulation.  What a great problem to have.

  • Here is an intriguing article suggesting that the market values Apple only on cash.  (HT Abnormal Returns).  The author nicely acknowledges the correlation/causation issues and his interesting charts of stock price versus earnings, earnings growth, and cash.
  • CNBC's Fast Money has a good discussion featuring Herb Greenberg and Karen Finerman about what the company should do with the cash.  Take a look.
  • To stay focused on data, I always recommend Chuck Carnevale's EDMP site.  He carefully warns that the earnings summary chart is just a starting point.  I agree, but it is a very good place to begin.  Take a look.

EDMP Apple

Investment Conclusion

Apple continues to be an attractive stock.  Many have missed out by making common mistakes instead of looking at earnings and earnings growth.

I like this assessment.

Investors could try the same exercise on the S&P or the Dow.  Just divide everything by 2.  You may be surprised to see that you have a situation similar to the March 2009 bottom, but with less risk.


Reader Note:  I'll be appearing in a Focus Roundtable tomorrow on monetary policy and the economy.  It is free to join the Focus group and to ask questions.  It promises to be a good session, and I am looking forward to it.




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