Monday, October 6, 2008

Apple Cheap: Unless it's Not

So World financial markets are melting down  and our favorite stock looks cheap cheap cheap.  Not so fast...

Apple is only cheap IF it is cheap relative to other alternatives in the market.   Since we have limited information and ability to research all the information about all the stocks in the marketplace we use the S&P as a proxy for the market and a warning.  In 1932 the average PE for the entire S&P 500 index was 8!

Apple is currently selling for 19X Earnings (14 if you deduct the cash they should be paying shareholders in stock buybacks/dividends)  The median P/E since 1920 is 15.7 (Robert Shiller Yale via Investopedia) and has been BELOW 10x earnings 5 times for a cumulative 11 years.  

Apple is easy to love and certainly the stock is, on a P/E basis the cheapest it has been in years, what is not clear is whether it is cheap relative to other stocks available in the marketplace.  What is Dell's P/E?

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