Three Stocks Worth A Look (AAPL, INTC, PG)

By Glenn Curtis | September 12, 2006 AAA

Fund managers keep a bead on thousands of stocks. The reason they do this is simple – so they have a stable of potential stocks to invest their client's money in at any one time. Now, it's impossible for individual investors to conduct that volume of research. But one can and should try to keep up to date on as many companies as possible, so that when an opportunity presents itself, they are ready to act.

To that end, as part of my running three part series, below I will review three companies that have made headlines in recent weeks, and give my take on each.

Apple (AAPL): Apple was center stage in the news a couple of weeks ago because it was forced to recall roughly 1.8 million faulty laptop batteries. Not good! But I consider that just a blip on the radar screen. I say this because in my mind, Apple really is firing on all cylinders right now. Their iPods are flying off the shelves, as are their accessories. In addition, it recently made press for bringing what I consider to be one of the most tech savvy people on Wall Street onto its board of directors, Eric Schmidt, who heads up Google (GOOG).

As far as valuation is concerned, Apple is not exactly a bargain. It trades at roughly 7 times cash, 6 times book value, and at more then 3 times its trailing twelve month's sales. On the plus side of the equation, Wall Street currently figures the company will earn $2.15 a share in 2006 and $2.60 a share in 2007, implying a roughly 21% growth rate.

My gut tells me that Apple's savvy management team headed by Steve Jobs will be doing its utmost over the next year to enable its customers to download content over their iMacs, or to introduce new gadgetry for the iPod. That means potential partnerships with some big name companies. But will this be enough to drive the stock materially higher from here and warrant an investment? I don't think so. I think that the stock could run a bit higher, sure, but that the upside is limited to perhaps a couple of points, particularly due to the fact that sales of its products are predicated upon a continued strength in consumer spending. And I just don't see that.

Keep in mind that insiders have unloaded roughly 2.3 million shares over the last six months. And while this action is mostly option related, it would be nice if senior execs would exercise their options and hold the stock, or if they could buy some token amount in the open market. But they haven't. And that in my mind serves as additional evidence, on top of its already lofty valuation, that the shares may be nearing a top.

Intel Corporation (INTC): Advanced Micro Devices (AMD) has been hot on Intel's tail over the past year, releasing new products, and heavily advertising its wares. As a result, Intel has been forced to cut prices, and try to recapture market share from its smaller competitor. That is a position that Intel is not quite used to!

Early last week Intel announced plans to cut some 10,500 jobs by the middle of 2007. This, in conjunction with its plan to cut capital expenditures going forward will save the company almost $2 billion and almost $3 billion in 2007 and 2008 respectively. I preface with the word "almost" because there is likely to be hundreds of millions of dollars in severance costs associated with these terminations. That said, I think these cost cutting measures are a prudent move.

But again, is this enough? The answer is no.

There are several other concerns I have. Insiders have been selling the stock (again most of the action is option-related), right near the 52-week lows. In fact, over the last six months, only one director purchased 500 shares, while a total of 2.7 million shares were sold. Valuation is also a question mark. At present, the company trades at just over 3 times book value, and at about 24 times calendar 2006 earnings estimates of 79 cents a share. Not exactly a bargain!

With that in mind, I plan to keep my eye on Intel because the company is truly the industry leader. And I think that they have the people, and the technology to continue to rule the roost. Ideally, I'd like to see the shares drop below $15 (assuming 2007 estimates remain stable at $1.05 a share) before jumping in. If the stock is sold off during tax loss selling season in November and December, I think I may get the opportunity to do just that.

Proctor & Gamble (PG): On Tuesday, September 5th the well-known maker of consumer products reaffirmed its fiscal first quarter guidance of between 76 and 78 cents per share. Analysts had been expecting the company to earn 78 cents a share.

Now if this were a tech company, the shares would have dropped like a stone. The word "disappointment" might have best summed up the announcement. But because Proctor develops and sells the goods that we use every day such as soap and deodorant and hair care products that we all need, regardless of economic conditions, they got a pass from investors.

The company trades at roughly 3 times sales, 3 times book value and at about 20 times 2006 estimates of $3 a share, which is at a premium to the 14% earnings growth that's expected over the next year. In other words, by classical valuation standards, the shares aren't in the bargain bin.

That being said, I think the stock will still move higher. And this is for two reasons. The first, as I alluded above, is that consumer goods companies fair well in difficult economic times. And Proctor and Gamble is perhaps one of the best plays in this group. The second is that the stock is trading right near its 52-week high.

Why is that an advantage?

Well, there is a dirty little secret in the mutual fund industry where fund managers will dump their losing positions before year end and pick up winning positions (stocks that are doing well), so that way when reports go out to shareholders, the position appears in the portfolio. Put another way, I think that fund managers will be jumping on the bandwagon, and chase this stock higher in the coming quarter in order to window dress their holdings. For the record, Barclays Capital and Berkshire Hathaway, Warren Buffet's baby, are currently two big stockholders.

So where can the stock go from here?

The high estimate on the street is $73 a share. I am a little more of a realist though, and I think the stock has about a 10% upside from current levels, which in this market isn't too shabby. Oh by the way, Proctor pays a dividend to boot, which at present has an annualized yield of 2%.

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