Why You Should Dump Facebook and Buy Apple

NEW YORK (RealMoney) -- On Friday, Apple (AAPL) closed at an all-time high of $648, and Facebook (FB) closed at its all-time low of $19.05. Over the weekend, this prompted a question from one casual stock-market observer: Is it time to sell Apple, which now seems overpriced, and buy Facebook, which seems cheap in comparison?

I told him no. In fact, I gave him the exact opposite advice -- sell Facebook and buy Apple.

Both companies are expected to grow rapidly over the next five years, with Apple's annual earnings expected to grow by 23% and Facebook targeted at 27%. I believe Facebook's estimates are overly optimistic, however, for reasons that are about to become clear.

Even after being halved since its initial public offering, Facebook shares are trading at 30x next year's earnings. But Apple, after experiencing a sevenfold increase in price, is trading at only 13x next year's earnings. Facebook's price-to-earnings to growth ratio is 1.59x, while Apple's PEG ratio is 0.66. In other words, even at Friday's closing prices, Facebook's anticipated growth is about 2.4x more expensive than Apple's.

There's no justification for this disparity in valuations, as these companies are headed in opposite directions. Apple has new products on the horizon that are bound delight their customers. The next iteration of the iPhone is now expected in September, and it could be the biggest handset launch of all time. The iPhone now accounts for the majority of Apple's revenue and profits.

Meanwhile, what does Facebook have on deck for its investors? Another 1.3 billion shares may be dumped on the market before year-end as insiders finally get their chance to exit. This doesn't change the company fundamentally, but it does invoke the law of supply and demand. There isn't much demand for Facebook shares now, and there is about to be a considerable increase in supply.