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Summary

  • Barron's surveyed investors to determine America's most respected companies.
  • Apple ranked atop the list due to key factors outlined by investors, however, I beg to differ and critically question Apple on each of the key factors.
  • Still, Apple ranks atop my list for investments to hold through the second half of this year nonetheless.

Barron's, one of my favorite weekly reads, published the results of a survey this weekend that showed Apple (NASDAQ:AAPL) as America's most respected company. With all due respect to the publishers of this great investors' tool, I beg to differ. Barron's says that what matters most is that the company displays strong management; that it practices ethical business; it should have a sound business strategy; displays a competitive edge and shows product innovation. I think we can make a critical argument against each of these factors in Apple's case. Finally, I think that what investors report to Barron's is not being backed up by real investment dollars in many cases, based on my interpretation of the one true measure of investor respect, valuation. With all that being said, Apple still tops my list among stocks to own today. That is because I believe it dropped the ball in years past and is a value today ahead of what I hope will be one of the big new value-added developments I have long been waiting for.

Barron's asked institutional investors to answer a survey on the nation's largest 100 companies based on market capitalization. It then used their answers to rank the firms. Barron's list showed Apple leading Berkshire Hathaway (NYSE:BRK.B), Boeing (NYSE:BA), Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Johnson & Johnson (NYSE:JNJ) among the top five finishers. Apple's return to the top of Barron's hill came after last year's fall to the number 3 spot. Still, Apple has dominated the list for four out of the last five years. Do you agree that it should have ranked so high each year? I do not.

According to investors, strong management is the most important factor in the forming of their opinion. But I believe many would agree that Apple took a serious blow when Steve Jobs passed away. After all, Jobs was an iconic figure with a position among great historical innovators. How could any other human CEO compare?

At the end of last year, I asked a question I think many of us have contemplated but been afraid to ask, Is it Time for Tim Cook to Leave Apple? My question followed the precedent set by Microsoft (NASDAQ:MSFT), when it parted leadership ways with its iconic leader Steve Ballmer. Many had blamed Ballmer for Microsoft's stagnation after Bill Gates left the company, and its meager valuation. Microsoft dropped the ball in mobile operating systems, but has since been making inroads on its way back into the game against Apple and Google. Well, those critical of Tim Cook's Apple will note the company's slowing growth and meager valuation. So it's a viable question to ask.

The second factor Barron's surveyed was whether the companies in question practice ethical business. And yes, Apple has come under scrutiny for alleged unethical practices. A year ago May, some in the Senate alleged Apple could be guilty of tax avoidance in the U.S. (see Is Apple Un-American?). I think most of us do our best to minimize our tax payments, and that Apple is no different than most of us in this matter. We probably need to give American companies better incentive to repatriate monies earned overseas. Still, one could legitimately question whether the company is the most ethical of all of America's largest firms. Of course, over the years, labor practices at Apple suppliers in China have also come under great scrutiny due to deaths and suicides. This SNL parody of a meeting between factory workers and iPhone critics illustrates the reality of worker conditions in a light way I think you will find easily digestible.

The third, fourth and fifth factors are somewhat relative to one another in Apple's case, and I have some serious questions to ask here as well. Barron's was looking for the best companies in terms of sound business strategy, competitive edge and product innovation. Now, Steve Jobs' Apple would without any doubt deserve top ranking here. However, does today's Apple seem like a reach to more than just me for the top spot of all, ahead of Google and others? Yes, of course the company operates a sound business strategy, has a competitive edge and innovates. But I wonder if it is it living on the spoils of past victories more than anything else?

Apple's Smartphone and mobile operating system market share are under assault, as evidenced by the latest data. It's to be expected, though, right? Everything good draws competition, and Apple certainly has done that since disrupting the mobile phone market and revolutionizing the Smartphone and mobile computing.

But can it do more to maintain its brand and market share power? Many believe it will do that when it releases a long-expected iPhone with a larger screen later this year. However, it's not an Apple innovation really; rather Apple will be meeting the challenge of its rival Samsung (OTC:SSNLF) in this regard. When I read the news these days, I take note of the innovation efforts of other companies, including Apple competitors like Samsung and Google. We have not seen a new product from Apple in a long while, and so I'm not sure the company deserves top ranking in terms of product innovation this year; at least not yet.

And product innovation is a facet of business strategy, so it weighs on my review of Apple in this regard as well. Though it's hard to challenge Apple here, because the company's recent move to sell phones into China, and its interesting and likely value-added business acquisition efforts are certainly representative of a company with a plan. Plus the shareholder rewards that have come through its share repurchases, dividend payouts and the recent stock split are noteworthy in this regard as well. Though, these came at the insistence of activist investors.

Apple still has competitive advantage over most if not all of its rivals, if by brand value alone. The company's name represents the best in the product categories it has become known for. But its advantage is under threat as its very viable competitors aggressively work to meet Apple. In my opinion, Google and others have done a better PR job than Apple over the years, and have begun to challenge the brand. In fact, when Millward Brown published its report on the world's top brands, it was Google atop the list, with Apple in second.

Stock

P/E TTM

PEG (TTM & 5 Yr. Growth Est.)

P/S

Apple

15.6X

1.2X

3.2X

Google

30.6X

1.9X

6.3X

Microsoft

15.6X

2.3X

4.2X

Finally, the best judge of a stock's character is its valuation, and Apple just doesn't get the respect other technology firms do in this regard anymore. Though, in anticipation of what may come later this year (new iPhone, possible Smartwatch or other new device or product), the stock has started to gain some upward lift and its valuation has gotten a bit more respectable. Even so, of the stocks listed here and among a greater group, Apple remains one of my favorites for the second half of the year. Part of the reason for that is its valuation and the rest of it is because of what I think will be a catalyst for capital appreciation and valuation expansion, that long awaited product innovation in Apple's playbook. So while I question whether the company deserves the top spot in terms of investor respect for this year, I believe it deserves a spot in every investor's portfolio today.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: Barron's Rated Apple As America's Most Respected Company - I Beg To Differ