After running the "All-Stars: Graham" ranking system on all 152 Russell 1000 tech stocks on September 4, I discovered the twenty best tech stocks, which are shown in the table below. In this article, I will focus on the top-ranked tech stock Apple (AAPL).
AAPL's Stock Performance
Since the beginning of the year, AAPL's stock is up 2.3% while the S&P 500 Index has increased 6.7%, and the Nasdaq Composite Index has gained 4.8%. Since the beginning of 2012, AAPL's stock has gained 86.2%. In this period, the S&P 500 Index has increased 73.3%, and the Nasdaq Composite Index has risen 101.5%. According to TipRanks, the average target price of the top analysts is at $126.27, representing an upside of 17.2% from its September 2 close price, which appears reasonable, in my opinion.
AAPL's Daily Chart
AAPL's Weekly Chart
Charts: TradeStation Group, Inc.
Valuation
Considering its compelling valuation metrics and solid growth prospects, AAPL's stock, in my opinion, is undervalued. AAPL's trailing P/E is low at 12.56, and its forward P/E is even lower at 12.09. The Enterprise Value/EBITDA ratio is very low at 8.15, and the price-to-free-cash-flow ratio is low at 15.44. Moreover, The PEG ratio is at 1.47.
In addition, most AAPL's Return on Capital and Margins parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the tables below.
Source: Portfolio123
Dividend and Share Repurchase
Apple has been paying a dividend since 2012. In April 2016, the company raised its quarterly dividend by 10%, to $0.57 per share. The annual dividend yield is at 2.12%, and the payout ratio is only 24.7%. The annual rate of dividend growth over the past three years was very high at 73.6%.
Apple is generating strong cash flow; cash flow from operations was $81.3 billion in fiscal 2015, and free cash flow was about $70.0 billion. In April 2016, Apple announced a $50 billion increase in its capital return program. The company is committed to returning the incredible sum of $250 billion to shareholders by the end of March 2018.
Conclusion
As I see it, AAPL's stock is considerably undervalued; the trailing P/E is low at 12.56 and its Enterprise Value/EBITDA ratio is very low at 8.15. Moreover, the company generates strong free cash flow and returns substantial capital to its shareholders by stock buybacks and increasing dividend payments. The average target price of the top analysts is at $126.27, representing an upside of 17.2% from its September 2 close price, which appears reasonable, in my opinion.
Apple is preparing to release the next generation of the iPhone at its annual event in San Francisco this Wednesday, September 7, and there are many rumors about the new iPhone. In my view, the enthusiasm level about the new iPhone will affect the stock price in the short term. However, in the long run, I believe that Apple's earnings are poised to continue to grow, and its stock as well.
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