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August 11, 2008 Issue Posted July 31, 2008, 5:00PM EST

Inside Wall Street

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Apple

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Brown & Brown

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Polycom

Gene Marcial on Investing

Don't Mind the Sour Grapes About Apple





People usually overreact, one way or the other, when it comes to Apple (AAPL). Despite continued strong demand for its new 3G iPhones, some investors remain concerned, mainly about CEO Steve Jobs' health. Also, Apple's modest forecast on profit margins for 2009 shocked investors. So the shares have slumped to 160, down from 189 on June 5. Not to worry, say some pros. Things aren't really so bad for Apple.

"We expect Apple's stock to continue to outperform the broader tech market, and despite possible near-term consumer spending challenges, Apple will demonstrate excellent growth," argues Matthew Kather of WR Hambrecht. He advises clients to use pullbacks in the stock to accumulate shares. He boosted his 2009 target to 257 from 238, based on his earnings forecast of $5.15 a share in 2008 and $5.43 in 2009. "There is no real risk in the short term about Jobs' health," says Kather. People "are overreacting to rumors."

Charlie Wolf of Needham (he owns shares), who rates Apple a strong buy, with a target of 240, says the rumor isn't material to the stock because Jobs, according to his sources, isn't sick and continues to run the company. Apple spokesman Steve Dowling refuses to comment, saying that Steve Jobs' health is "a private matter." Kather sees gross margins of 32.5% in 2009, vs. Apple's figure of 30%. He says iPhone will be the "next driver for Apple's continued growth."

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

—By Gene Marcial

Broker Brown: Buyout Bait?

Some investors who have made a killing in oil are starting to switch into beaten-down financial stocks. Nicholas Galluccio, CEO of Teton Advisors, says the financials are where smart investors will gather, and he is already buying stock in Brown & Brown (BRO), a major insurance broker, whose shares have dropped to 17, down from nearly 30 a year ago.

Two factors, he says, will take it higher: recovery in the insurance business, badly hurt by the housing meltdown, and an industry consolidation, where Brown will be a likely buyout target. Several big companies in the industry have already acquired smaller players, notes Gallucio, who sees Brown hitting 25 in a year.

Mark Hughes of SunTrust Robinson Humphrey, who rates Brown (a client) a buy, foresees profits in 2008 of $1.30 a share on revenues of $985.9 million, and $1.43 in 2009 on $1.1 billion.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

—By Gene Marcial

A Pure Play in Videoconferencing

The market for videoconferencing equipment should grow to a record $5 billion in five years, according to Wainhouse Research, and a big player is Polycom (PLCM), which makes a line of video, voice, and Web conferencing gear. "It is the No. 1 pure play in videoconferencing, which is benefiting from the high cost of travel because of rocketing fuel prices," says Gregory MacArthur, president of Viewpoint 2000, which owns stock, now at 23 a share, down from 36 a year ago. With Polycom's strong financial performance, it should earn $1.49 a share in 2008 and $1.70 in 2009, figures MacArthur.

Manuel Recarey of Kauf-man Brothers considers "any weakness in the stock a buying opportunity," so he rates Polycom a buy, with a target of 30. Polycom is a global leader in an industry that should "exhibit solid growth over the next several years," says Recarey.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

—By Gene Marcial

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