The $1 trillion market cap reached by Apple (AAPL) is an intimidating number, and might make you wonder, how can such a large stock not be overvalued? questions Crista Huff, growth stock expert and editor of Cabot Undervalued Stocks Advisor.

One trillion is a big number, so it naturally evokes thoughts of excess. There are a variety of ways that investment professionals measure value, but I assure you, market cap is not one of them. (Frankly, share price is not a measure of value either.)

Price/earnings ratios (P/Es) and PEG ratios are common valuation measures, as are cash flow and debt ratios. I like to focus on P/E and debt, but AAPL’s PEG ratio is quite low as well. Generally speaking, I want to see a p/e that’s lower than an earnings growth rate.

Bigger picture, I might also consider the stock’s historical average p/e, the current average industrywide P/E, dividend yields, and next year’s expected earnings growth rate when looking at the current raw P/E number. It’s important to me to eliminate as much obvious stock market risk as possible, so that you and I are less likely to have a horrendous investment experience.

Believe me, there’s enough risk in stock investing that we don’t need to voluntarily ask for more! Apple has been undervalued for well over a year now, and we’ll get to the current numbers in just a sec.

But I also want to point out that the company spent $20 billion on share repurchases during the recent quarter, and had $243 billion in cash and marketable securities as of June 30, representing about 26% of the stock’s market value. That’s an awful lot of liquidity!

Market cap does not tell us anything about value until we know more about the other moving parts of the company’s balance sheet. Analysts now expect EPS to increase 27.4% and 15.8% in fiscal 2018 and 2019 (September year-end). The corresponding P/Es are 17.7 and 15.3. The stock is moderately undervalued based on 2019 numbers. 

Apple is my favorite stock for long-term investors. I believe almost every stock investor should own some shares. I think the best price you’re likely to get will be on a brief pullback below 200. I rate the stock a strong buy.

Subscribe to Crista Huff's Cabot Undervalued Stocks Advisor here…