Why Apple's And Seagate's Stocks Are Long-Term Investment Opportunities Right Now

| About: Apple Inc. (AAPL)

After three years that the stock market showed nice gains in the month of January, the first month of this year disappointed many investors as the S&P 500 Index declined 3.56%, the Nasdaq Composite Index declined 1.74%, and the Dow Jones Industrial Average lost 5.30%.

There is a market conviction; as goes January, so goes the year. Although statistically it has been true at 71% percents of the 35 last years, in some years it behaved just the opposite as shown in the table below, personally I would ignore this signal and focus on looking for leading companies that their stocks have recently significantly declined after a disappointing earnings report.

I see the two market leaders Apple Inc. (NASDAQ:AAPL) and Seagate Technology (NASDAQ:STX) as such companies and I think that these two stocks are still a bargain at the current price for long-term investors.


Apple announced its first-quarter fiscal 2014 earnings report on January 27, and although it beat analysts' EPS consensus by $0.43 and its revenue exceeded Wall Street's target by $130 million, its stock fell 8% the next trading day and another percent later. Investors' disappointment was caused by the fact that the company sold "only" 51 million iPhones during the quarter, which was below Street expectations ranging from 54 million to 56 million. Apple's outlook for revenue in the current quarter in a range of $42 billion to $44 billion was also below consensus for $46.1 billion.

The company ended the quarter with $158.84 billion in cash, equivalents, and long-term investments, and $16.96 billion in long-term debt, or $142 billion in net cash. Although Apple returned $7.7 billion in cash to shareholders through dividends and share repurchases during the December quarter, Carl Icahn and other investors are continuing to put pressure on the company to escalate its share repurchase plan. I think that the fact that Apple's management is resisting the external demand to increase its share repurchase program is an indication that the company see strong growth prospects ahead, the company is continuing to invest heavily in new products and CEO Tim Cook has promised that Apple will come out with products in entirely new categories this year.

Now let's look at the numbers, Apple has recorded exceptionally strong revenue and EPS growth during the last five years. The average annual sales growth for the past five years was extremely high at 35.45%, and the average annual EPS growth for the past five years was unusually high at 42.44%, only Facebook (NASDAQ:FB) among S&P 500 tech stocks has recorded combined stronger results; average sales growth of 96.02% and average EPS growth of 64.38%. According to Yahoo Finance, Apple's next financial year forward P/E is at 10.83 and the average annual earnings growth estimates for the next 5 years is at 19.58%, these give an extremely low PEG ratio of 0.55, only Lam Research (NASDAQ:LRCX) among S&P 500 tech stocks has a lower PEG ratio of 0.48 (see my article about Lam Research). The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.

As a devoted user of Apple products; iPhone, iPad and iTunes, I believe, in contrast to many doubters, that Apple has not lost its ability to grow, its products are the best in the market, and exciting new products will come out soon. In my opinion, it is now a rare opportunity for a long-term investment in such a great company at a remarkably cheap price.

Seagate Technology

Seagate announced its second-quarter fiscal 2014 earnings report on January 27, results were slightly below expectations, with guidance also a bit lower. Seagate experienced slowing growth in its cloud storage business, in the recent quarter. According to the company, weakness in the cloud business was due to long-term rollouts by some of its original-equipment manufacturer customers, OEMs had accounted for about 68 percent of the company's total revenue as of June. Seagate and rival Western Digital (NYSE:WDC) are tapping into the growing demand for products that help store data in the cloud and reducing their dependence on personal computer hard drives as consumers shift to smartphones and tablets. Second-quarter EPS came in at $1.32, a $0.06 below analyst expectations, and revenue fell almost 4%, year over year, to $3.53 billion while consensus expectations were for $3.56 billion. For the third quarter, Seagate expects revenue of at least $3.4 billion, a bit short of analysts' forecast sales of $3.46 billion. The hard drive maker also said that its gross margin will be relatively flat compared to the second quarter. Investors were disappointed to see that Seagate sales dropped while that of its rival Western Digital gained, and the stock tumbled 11.25% in the next trading day.

I find the market reaction exaggerated, one slightly disappointed quarter does not change the fundamentals of a great company. Just consider Seagate's fundamentals; According to Yahoo Finance, Seagate's next financial year forward P/E is at 9.32, and the average annual earnings growth estimates for the next 5 years is at 12.50%, these give a remarkably low PEG ratio of 0.75. Furthermore, in order to compare Seagate's profitability and efficiency with other tech stocks, I ran the Portfolio123's powerful screener and I found out that, among all S&P 500 tech stocks only Accenture plc (NYSE:ACN) and International Business Machines (NYSE:IBM), have a combination of ROE+ROI+ROA greater than that of Seagate.

Seagate is generating a lot of cash; its ttm price to free cash flow of 11.97 is among the lowest of all S&P 500 tech stocks. The company continued to deliver large sums of cash back to shareholders, during the second quarter the company generated approximately $856 million in operating cash flow, paid cash dividends of $142 million and repurchased 33 million ordinary shares for approximately $1.5 billion. Seagate has raised its payouts at an uncommonly high rate during the last five years; the annual rate of dividend growth was at 27.5%. The forward annual dividend yield is quite high at 3.30%, and the payout ratio is only 27%.

I consider Seagate's stock as a good combination of value and growth dividend stock, and in my opinion, after the retreat in its stock price, it is now an excellent opportunity for a long-term investment in a good company at a cheap price.

Disclosure: I am long AAPL, STX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.