Is Apple Stock A Good Buy?

Michael Vodicka's picture

Friday, June 30, 2017 - 2:30pm

by Michael Vodicka

Warren Buffett is the 2nd richest person in the world in Forbes's 2017 annual ranking, with a net worth of $76 billion.

Buffett has accumulated his riches from investing in almost every sector -- everything from candy companies to insurance companies.

One notable exception from amassing his fortune? Technology stocks.

Buffett is notorious for avoiding the technology sector altogether because he loves investing in companies that are easy to understand.

Buffett once commented on his distaste for tech, saying "I know about as much about semiconductors or integrated circuits as I do of the mating habits of the chrzaszcz (the polish word for Beetle). We will not go into businesses where technology which is way over my head is crucial to the investment decision."

However, this view came to a screeching halt in May of 2016. That’s when Buffett broke with tradition and bought 9.8 million shares of Apple.

Since then, he’s kept on buying. In January Buffett bought another 72 million shares.

Today, Buffett owns 2.5% of Apple, making it his 2nd largest holding. These moves have a lot of investors asking an important question.

Is Apple stock a good buy?

Absolutely. Let me explain why Buffett couldn’t resist Apple.

Apple Is One Of The Most Undervalued Stocks In The S&P 500
Buffett loves undervalued stocks, and Apple is one of the most undervalued stocks in the S&P 500 and technology sector. Its forward P/E ratio of 14 is a 30% discount to the S&P 500's 20.

Despite the discounted valuation, Apple is still posting impressive growth that should easily outpace the S&P 500. Earnings are on pace to grow almost 8% in 2017 and another 18% in 2018.

Apple Has $246 Billion In Cash On Its Balance Sheet
Apple's cash position of $246 billion is larger than than the GDP (gross domestic product) of most countries in the world.

This huge cash position was definitely one of the reasons Buffett bought shares.

Using as little as half of its cash balance to repurchase shares adds another $125 billion to Apple's market cap.

I also expect Apple to use this cash to grow its dividend.

Apple Has One Of The Fastest Growing Dividends In The S&P 500
Technology companies aren’t known for paying dividends. But once again, Apple is breaking the mold. In the last five years Apple has grown its dividend by 502%, making it one of the fastest growing dividends in the S&P 500. Take a look below.

Apple Has A Shot To Be The First Trillion Dollar Company 
I see five S&P 500 companies with a shot at breaking the $1 trillion mark in the next five years.

That includes, Facebook (Nasdaq: FB), Amazon (Nasdaq: AMZN), Microsoft (Nasdaq: MSFT), Google parent company Alphabet (Nasdaq: GOOG), and Apple.

I believe every one of these companies will eventually be worth $1 trillion in due time. However, thanks to a variety of factors, I believe Apple is set to be the first.

Apple has been on a roll in 2017. Shares are up 26%, giving it a market cap of $760 billion.

At this point, Apple would only need to climb 31% to $200 to give it a market cap of $1 trillion.

That is well within reach, particularly considering earnings are expected to grow 26% in the next two years alone.

Risks To Consider: Apple has struggled to launch new hits in the last few years. Although sales growth in its most important product the iPhone is still strong with many loyal customers, Apple isn't the innovative company it was under Steve Jobs.

Action To Take: Buffett's huge position in Apple is an important signal. Even though shares are trading at an all-time high, I see plenty of growth and gains ahead. Buy shares anywhere below the all-time high and invest right alongside the greatest investor in history.

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Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.