By Douglas Ehrman
There are certain stocks that have spent so much time being loved by investors that they can rightly be called all-stars. These companies have led the market in one way or another, either defining a segment, innovating in a new arena, or simply delivering consistent returns at a level that is unachievable by most. In short, these are all-stars that, if bought at the right time, can make you money. What follows is a discussion of several of these stocks, their respective advantages and disadvantages and a brief look at how they stack up against their peers.
Apple, Inc. (AAPL) – Standing as one of the largest companies on the planet, AAPL has long been a Wall Street darling, essentially since the triumphant return of Steve Jobs. While investors and “i” lovers alike now stand breathlessly waiting to see how the company will fare in his absence, the stock shows no signs that collapse is imminent. The most appropriate competitors to consider are Google, Inc. (GOOG), Hewlett-Packard Co. (HPQ) and Research In Motion, Ltd. (RIMM). On a valuation basis, the picture is mixed, with AAPL and GOOG looking strongest in terms of operating margin – APPL has an operating margin of 30.4%, GOOG has an operating margin of 33.6%, 10.2% for HPQ and 21.8% for RIMM. In terms of price-to-earnings ratios, APPL trades at a trailing price-to-earnings ratio of 15.6, GOOG is 19.6, HPQ is at 5.5 and RIMM is at 4.7. When growth is introduced, the price-to-earnings over growth (PEG) ratios are as follows: 0.62 for APPL, 0.8 for GOOG, 0.59 for HPQ and 1.25 for RIMM. This last metric is, perhaps, the most telling; APPL and GOOG are battling – with the slight edge to AAPL – HPQ is in a slightly different niche, but is cheap, and RIMM is facing a potentially insurmountable headwind. With the potential catalyst of the iPhone 5 on the horizon, owning APPL may be a reasonable idea.
Wells Fargo & Co. (WFC) – With Bank of America (BAC) being forced to considered placing Countrywide into bankruptcy, Citigroup (C) attempting to reinvent itself, and UBS (UBS) reeling from a $2 billion fraud, even placing the numbers into the mix there are too many unknowns in most large financials. Enter WFC. With solid numbers and a conservative approach to the world, only JPMorgan (JPM) might be a suitable substitute for WFC. The company is trading at a trailing price-to-earnings ratio of 9.6, which trails C’s 8.7 level. However, when C’s operating margin of 20.4% is placed against WFC’s 34.6%, the choice here becomes far easier. Additionally, with a dividend yield of 1.9%, WFC is a reasonable income play, as at least an added inducement behind the overall appeal of the stock.
Berkshire Hathaway, Inc. (BRK.A and BRK.B) – There are few more famous, or harder to classify, stocks than the two classes of Berkshire shares. BRK.A is known for its nearly unattainable high price, and both are known for the iconic founder of the company, Warren Buffett. In terms of a catalyst for buy either A shares or B shares, there have been only a handful of times in the past thirty years that Warren Buffett has publically announced his affinity for stocks; when he has, he has generally been right. Recently, Mr. Buffett has made such a statement. It is reasonable, therefore, to look to Mr. Buffett’s company, one which is a holder of countless smaller operating companies, to perform well in this type of environment. Berkshire shares trade at a trailing price-to-earnings ratio below 15 and the company has an operating margin of 13%. With Mr. Buffett’s endorsement of the market in general, now may be a great time to buy Buffett. We recommend participating in his picks through BRK.A or BRK.B.
Weatherford International, Ltd. (WFT) – When compared to competitors like Halliburton Co. (HAL), Baker Hughes Inc. (BHI), Patterson-UTI Energy Inc. (PTEN), Nabors Industries Ltd. (NBR), WFT stands apart only in the fact that its growth estimate for 2012 is above its peers at nearly 90% relative to an average in the high 30% range. Thus, as a pure growth play, WFT is the best trade using forward looking, but no very long-term considerations. On a valuation basis, some of the metrics are as follows: on a trailing price-to earnings basis, WFT is at 71, HAL is at 15.2, BHI is at 19.6, PTEN is at 14.9 and NBR is at 18.5; for price-to-earnings over growth (PEG) ratio, WFT is at 1.15, HAL is at 0.45, BHI is at 0.48, PTEN is at 0.57 and NBR is at 0.55; and for operating margin, WFT is at 8.7%, HAL is at 17.9%, BHI is at 12.9%, PTEN is at 19.5% and NBR is at 10.1%. On metrics alone, there are other strong options, suggesting that if you are searching for more than a growth bet, a diversified approach may be the best approach.
Adobe Systems, Inc. (ADBE) – In many ways, this company is Steve Jobs’ nemesis in that his distaste for Adobe Flash has led AAPL to shun the platform often to the extreme annoyance of Apple's customers. So deep is this divide that many have abandoned APPL is favor of Android from Google, Inc. (GOOG), just to have the ability to run flash. With Jobs’ departure from APPL, it has been speculated that future “i” products may allow flash. If this happens it would be an enormous catalyst for the company, and could represent a windfall for shareholders. As an application software company that is so deeply ingrained in the smartphone and tablet market, using software companies as comps can be problematic. In terms of the metrics, with a trailing price-to-earnings ratio of 13.6 relative to an industry average of 23.4, and an operating margin of 28.9% relative to an industry average of 10.2%, the company appears to be well positioned moving forward. If the discussed catalyst occurs, the return on this stock could be quite significant.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.