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How to Trade Apple's Record-Shattering Growth

By Larsen Kusick, analyst, Phase 1 Investor
Monday, July 25, 2011

Last week, Apple confirmed what Growth Stock Wire readers have known for many months...
 
There's an incredible "gadget boom" taking place right now.
 
The shocking part is the boom is happening even faster than optimistic analysts were predicting a year ago. Just take a look at the numbers...
 
In just three months, Apple sold over 20 million iPhones and over 9 million iPads. Total iPhone sales are on pace to soar above 75 million units in 2011 and over 100 million next year. During the recent quarter, iPhone sales were up 142% compared to the same period last year. That's a ridiculous growth rate for a device that was already popular a year ago.
 
The iPad is getting started on the same path. Apple is on pace to sell over 40 million of these tablet computers in 2011. That's about three times as many as last year. Within a couple years, it wouldn't be surprising to see over 100 million iPads being sold every year.
 
Never in history has a company had two products that are atop one of the biggest trends in the world.
 
The most amazing part of the Apple story is that even though its revenues are about to crack the $100 billion-a-year mark... growth is accelerating.
 
A year ago, Apple was growing revenue at an annual rate of just over 60%. That number has increased in each of the past four quarters. In the most recent quarter, Apple's growth rate jumped to 82%.
 
It's foolish to think Apple will keep this kind of growth up for years... But it does show the gadget boom is still a huge deal. International markets like China offer huge long-term potential. Apple already generates over 60% of its sales outside the U.S. You can expect international sales to rise steadily over the next few years as more people can afford iPhones and iPads.
 
So is Apple a good buy here?
 
It depends on what you're looking for as an investor. Even after rising 20% over the past month, Apple's shares are cheap – trading at just 13 times 2011 earnings expectations. Apple has no debt and is sitting on more than $81 per share in cash and equivalents.Trouble is, everyone knows this. Some Wall Street analysts moved their price target on the stock up to $500 or more last week (it's trading around $390 now).
 
Apple's size creates another drag on growth. The bigger a company gets, the harder it becomes to maintain a high rate of earnings growth. Apple should easily be able to grow earnings at a 15% clip in 2012. After that, the company will need a new blockbuster product to drive earnings growth.
 
If you're looking for huge upside potential, you're better off looking at smaller companies that can grow faster than Apple.
 
Apple's results confirm that hundreds of billions of smartphones and tablets are going to be sold over the next decade. That means big profits for the small companies that supply parts, software, and other services to Apple and other device makers.
 
For example, small-cap companies like Skyworks Solutions (SWKS), TriQuint Semiconductor (TQNT), and RF Micro Devices (RFMD) supply the tiny chips that manage the signals going back and forth between wireless devices and cell phone towers. Cypress Semiconductor (CY) is another small company that makes the parts that make touchscreens work properly.
 
Even tiny software companies like Magma Design (LAVA) appear on Apple's supplier list. Software plays a key role in designing complicated devices like smartphones and tablet computers.
 
These are just a few of the companies poised to benefit from the gadget boom. It's almost guaranteed a few small companies will end up becoming A LOT bigger over the next few years.
 
Smaller stocks almost always carry higher risks than established large-cap names do. These small-cap names are a "swing for the fences" alternative to giants like Apple.
 
Good investing,
 
Larsen Kusick




Further Reading:

Editor in Chief Brian Hunt considers Apple a "go to" growth stock for any serious investor. And with its sudden upside breakout, Brian's convinced the company has a lot further to run. Read more here: An Incredible Move Higher For Apple.
 
If you're looking for another low-risk play on the gadget boom, check out one more of Larsen's best picks. It's guaranteed to make boatloads of cash for many years with its high-traffic "tollroad." Get the details here: A Low-Risk, High-Income Play on the Gadget Boom.

In The Daily Crux
Market Notes
The "bargain commodity"... natural gas prices are flat in 2011, while oil and gold are up more than 9%.
 
Gold miner index GDX touches its highest level since April... up 15% in less than one month.
 
China Mobile breaks out to five-month high.
 
Big biotech indexes XBI and IBB sit less than half a percent from fresh all-time highs.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1345.02 +0.1% +23.0%
Oil (USO) 38.93 +0.5% +9.9%
Gold (GLD) 156.12 +0.8% +33.6%
Silver (SLV) 39.07 +2.0% +120.6%
U.S. Dollar 74.01 -1.1% -10.4%
Euro 1.44 -0.4% +11.4%
Volatility (^VIX) 17.52 -0.2% -28.9%
Gold Stocks (^HUI) 578.29 +1.2% +28.5%
10-Year Yield 2.96 -1.7% +1.0%

World ETFs
Symbol Price
Change
52-Wk
S. Korea (EWY) 66.77 +0.2% +39.3%
Taiwan (EWT) 15.37 -0.3% +28.1%
Israel (ISL) 17.78 +0.6% +27.2%
Canada (EWC) 32.61 +0.1% +26.5%
USA (SPY) 134.58 +0.1% +25.4%
S. Africa (EZA) 71.09 -0.4% +23.5%
Singapore (EWS) 14.27 +0.4% +23.1%
Russia (TRF) 21.70 +0.1% +20.1%
Japan (EWJ) 10.88 +0.2% +17.1%
Lat.America (ILF) 50.41 +0.0% +11.9%
India (IFN) 30.37 +0.6% +6.4%
China (FXI) 42.44 +0.6% +5.3%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service (OIH) 161.53 +1.5% +55.0%
Internet (HHH) 79.38 +1.2% +51.2%
Basic Mat (IYM) 81.12 -0.1% +39.8%
Retail (PMR) 21.59 +0.3% +33.0%
Consumer Svcs (IYC) 74.20 +0.4% +32.2%
Big Tech (QQQQ) 59.60 +1.0% +31.3%
Media (PBS) 15.35 +0.3% +30.5%
Real Estate (IYR) 62.87 +0.5% +30.2%
Biotech (PBE) 22.75 +0.4% +30.0%
Industrials (IYJ) 69.56 -0.7% +28.8%
Health Care (IYH) 74.31 -0.1% +28.7%
Transportation (IYT) 97.77 -0.1% +27.5%
Telecom (IYZ) 24.54 +0.1% +27.0%
Water (PHO) 19.79 -0.3% +26.4%
Big Pharma (PPH) 71.84 +0.0% +25.4%
Semis (PSI) 16.53 +2.9% +23.5%
Software (PSJ) 26.35 +1.0% +22.5%
Construction (PKB) 13.19 -0.5% +19.2%
Defense (PPA) 19.96 -0.8% +18.7%
Utilities (XLU) 33.82 -0.6% +15.9%
Insurance (PIC) 16.29 -0.2% +14.5%
Financials (IYF) 56.49 -0.1% +10.3%
Nanotech (PXN) 8.86 +0.6% +3.6%
Alt. Energy (PBW) 8.78 +0.9% -4.2%

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