$300 price target for Apple by 2012
Financial commentators obsess on recent news like the impact on stock prices of Greek fiscal policies but the dominant downbeat continues to be unemployment. Psychologists report that long-term unemployment can be as debilitating as the death of a family member. The Federal Reserve continues to hold interest rates down to facilitate loans to employers while the Administration attempts to squeeze through some employment measures. There are a few signs of improvement but the country is in the early stages of a long climb back.
In this environment, investors fortunate enough to have capital available for stock investments are in a commanding position. Valuations remain low with the S&P 500 trading around 13 times estimated 2010 earnings. Many common alternatives are not attractive. Real estate remains uncertain while gold and other commodities have been weak as a rising dollar pressures their prices. In contrast, stocks in sectors reporting rising earnings, especially technology, are tempting.
Apple (AAPL-$203) stands out. Its newest product, the iPad, brought the usual wave of negative criticism that seems to greet all of its new product announcements. It may be that this is another failure like the Newton but I believe it will soon become part of the equipment of professors and teachers, coaches, theater and movie directors and just about everyone else who now uses a clipboard in his or her work.
The iPod and the iPhone got similar negative receptions but their design and support took them well ahead of competing but less inspired products. Both desk computers and laptops were in use before the Internet became a ubiquitous part of the environment and this innovative product may supersede them to some extent.
The design and marketing skills of Apple take advantage of technological innovations much as Gutenberg did. He did not invent printing, as some of us were taught in school; the Chinese did a thousand years earlier. He did not even introduce movable type but did innovate the use of movable metal type. This didn’t work well with the inks in use so he also brought in oil based ink, modifying formulas that Renaissance painters were employing as they switched from tempura paints. Finally, he modified screw presses in use for olives to print the books. Literacy was expanding much like Internet use today and millions of books were sold within a few years.
Current earnings estimates for Apple’s fiscal year ending in September are over $11.00 a share, up 80%. That’s a P/E ratio of 18, reasonable for such growth. Its stock will always be volatile and there is no dividend (no debt, either) but I believe a price target of $300 by 2014 is achievable.
To stabilize portfolios and add dividend income, I am adding stocks like Glaxo (GSK-$39), the UK-based world’s second largest drug company. Growth is only in single digits but there is a 5.9% yield from a regularly raised dividend. Generic drugs are pressuring its margins and a natural complement in stock portfolios is Teva Pharma (TEVA-$58), which is posting earnings gains in the mid-teens while paying a modest 1% dividend yield. To make room for these, I am selling my Gilead Sciences (GILD-$47), a fine research-based company with some recent drug approval setbacks and no dividend.
Waste Management (WM-$33) reported quarterly earnings that exceeded estimates and recently raised its dividend. The company estimates 2010 earnings now around $2.13, a 10% increase, and I believe this is on the conservative side. Even so, that’s a P/E of only 15 and its stock yields almost 4%.
We will continue to invest in interesting times and I continue to recommend tempering volatility and increasing income with discounted closed end bond funds. My favorites remain Credit Suisse Income (CIK-$3) and Alliance Global High Income (AWF-$13), paying monthly dividends over 9%.