Apple: Growth or Value?

In many money managers' eyes, the recent decline of Apple's share price could mark Apple's transformation from a fleet-of-foot growth stock—one that is seen as risky but whose growth prospects could lead to big gains—to a more plodding value stock—one that trades at a low price relative to earnings and offers regular payments such as dividends.

Apple has dropped roughly 28% from its closing high of $702.10 reached in September, wiping out about $200 billion in market value, about the equivalent of Pakistan's annual gross domestic product.

The big question is whether investors believe Apple's earnings growth can continue. The company is so large now—revenue is slated to exceed $190 billion in the year ending in October—that such outsize gains in its top line may be hard to achieve. That makes it unattractive to many investors seeking revenue and share-price growth. At the same time, many value investors aren't convinced the company is cheap enough, even though its price/earnings ratio is 10 times, compared with 13 times for companies on average in the S&P 500.

Apple is set to enter what is sometimes called "growth purgatory," an inevitable shift that occurs when a company becomes so big that it can no longer increase earnings at the same rate that investors had become accustomed to. Growth investors also likely sell at a faster pace than value investors buy.

Evidence of that is seen with investors seeking growth moving out of Apple for the past year. To some extent, value investors have moved in to replace them. In December 2011, some 82% of growth funds in a sample of more than 800 U.S. mutual funds with more than $1 billion of assets owned Apple.   These days, that figure is 77%.

Source:  Wall Street Journal

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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