6 reasons to buy back into Apple

Growth investors are shedding this stock, and value investors have yet to embrace it. Here's why the time is right to jump in.

By StreetAuthority Apr 10, 2013 8:37AM
iPad miniBy David Goodboy, StreetAuthority                                              
"Apple computers? Aren't those for artists and graphic-design nerds?" I asked the salesman demonstrating a version of the Apple Macintosh in the early 1990s. "I need a real computer, not something to paint pretty pictures on and design flowers with."

"You will understand one day, friend," the salesman said with a smile.
 
I ended up purchasing an IBM (IBM) desktop and didn't think much about Apple (AAPL) -- as a computer or an investment. That is, until 2007 -- when everything changed. But this change didn't come from a desktop computer.

I have always had a preternatural attraction to cellphones, particularly smartphones. My obsession started with the very first Palm Pilot in the late 1990s and progressed through various alternatives before moving to the once-popular BlackBerry (BBRY) series. I tried a new handset every six to 12 months. 

Despite my doubts about Apple, the iPhone struck my fancy. It rode in on waves of publicity in June 2007, and the first time I touched it, I became an Apple aficionado for life. This phone was not just another gadget. It provided an intuitive connection between my mind, hand and device. 

I have owned each generation of iPhone. They are the only smartphones I have purchased since 2007. As a fan of the iPad and iPhone, this former Apple skeptic has become a true believer.

Obviously, I am not the only one who feels this way: Investors riding the mass movement to Apple's products pushed its shares from under $100 at the start of 2007 to $700 in September 2012. As you can see from the chart, this trip higher was nearly straight up, without a pullback during the 2008 financial crisis. In fact, Apple temporarily surpassed ExxonMobil (XOM) as the world's largest company in terms of market capitalization. 



But since the September highs, shares have plunged to the $425 range, with only $75 to go before a 50% value slash. What has happened to this once high-flying stock?

The company cites a delay in supply-chain shipments and a failure by manufacturers to keep up with demand as major factors in the sell-off. Many analysts hold the company to ridiculously high standards of performance. Even with record-breaking sales, analysts expected more; Apple's recent failures to meet their expectations have hurt its stock price. 

Apple is a victim of its own success. Although it's unlikely the stock will ever reach its September highs again, a 100-plus-point recovery to the $550 range is possible. 

That's why I've outlined six reasons to buy Apple right now:

1. Changing perception
Due to competitive pressure and a lack of hype-inducing products, Apple is no longer a growth stock. It is making the transition to a value stock, hence the selling. 

Growth investors are comparing future growth with past growth, which makes future growth appear weak. The original growth investors are selling shares in their search for the next big thing, but value investors have not yet embraced Apple. This change in perception may take some time, but when it does, prepare for a rally. 

2. Record results
Apple posted record quarterly revenue of more than $54 billion and a record profit of just over $13 billion in its fiscal first quarter. This was the result of nearly 50 million iPhones and 23 million iPads sold during the quarter -- not to mention the more than $2 billion in revenue just from the iTunes Store, with record sales of music, apps and videos. 

Any other stock would have soared on these stellar numbers. But as mentioned, Apple is a victim of its own success, which has brought it with unrealistic performance goals. Once long-term value investors drill into these numbers, they should embrace the stock.

3. Dividends
Apple produces a 2.5% dividend yield that could easily spike if the company decides to deploy its cash hoard. Apple has seen recent pressure from hedge-fund manager David Einhorn to release more of this money to shareholders through a proposed high-yield preferred stock program.

4. Cash stockpile
With its $137 billion of free cash and investments, Apple could just about weather the apocalypse. 

But the majority of these funds are held overseas, and it would probably take a change in tax laws for them to be repatriated. In the event of such a change, these funds could take the form of share buybacks and dividends. That could increase share value in the eyes of value investors.

5. Potential for new disruptive products
Remember, we are talking about the company that created the iPhone and iPad. These set a strong precedent. Imagine the hype and stock rally if Apple unveils another incredible product.

6. High margins
Apple's profit margins are the highest in the smartphone business. The company boasts a 58% margin, which compares with 43% for BlackBerry. This provides a tremendous competitive advantage.


Risks to consider: Many analysts consider Apple products to be overpriced, with a rapidly fading "coolness" factor. In addition, the company's market share in the smartphone category is slipping due to competition (not to mention that the original driving force behind Apple, Steve Jobs, is no longer around to motivate the company). Always use stops and position size properly, no matter how much you believe in an investment.

Action to take: As long as the stock holds above the 200-week simple moving average of about $375, I like Apple as a buy, with an 18-month target price of $550 to $575.

David Goodboy does not own any of the securities mentioned in this post. 

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18Comments
Apr 10, 2013 12:17PM
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I think they messed up when they started bring out new products too often. People are like, "I just got this one. I'll get the one after." It's kind of like how Guitar Hero\Rock Band died. Too many of them too soon. Flooding the market.
Apr 13, 2013 4:59PM
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Have you ever noticed that when 99% of the analysts are behind a stock, a major correction is just around the corner?  Last summer, nearly every analyst was predicting between $800 and $1000 for AAPL by year end. At the same time they were predicting the demise of RIM and NOK.
Apr 10, 2013 3:20PM
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If they split these stocks when they reached $100 we could get a read on what they`re

worth.I`m not going to buy only a few shares.I know the arguments against splits, but

I don`t buy it.

Apr 10, 2013 7:49PM
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V_L...Apple has about 20 new products and many more innovations in its shortterm pipeline.

 

About the only thing wrong with this stock...is not about the stock or its value proposition...its the short sellers that are holding apple mgt hostage because they want to get paid a special dividend because these shorts feel apple is holding too much cash.

 

Well like you...they have stinking thinking...you always wind up on the wrong side of a trade and out of the money...honey!

 

TooT...TooT

Apr 10, 2013 12:15PM
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Apple is becoming a commodity company much like an Exxon or Wall Mart. At its peak, it was worth more than Exxon. That was a ridiculous valuation, but it was another example of irrational exuberance on the part of its investors. Of course, that couldn't last and thus its decline to where it is today.

Its growth was dependent upon new and innovative products that everyone wanted. Unfortunately for Apple, this drew a lot of competitors like Samsung into the smart phone fray.

A problem for all growth company is they grow to a size so large that each new product no matter how great contributes a smaller and smaller share to its earning. Essentially it can't remain a growth company and become perhaps a value company. 

Today I'd only want Apple if it was selling at a very reasonable P/E and it had a meaty dividend. 

Har har har!
Apr 10, 2013 12:25PM
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Apple must show that it is relevant in the new product arena or we will be waiting a very long time for a move to the upside in its stock price.  Without innovation Apple products are commodities.  This is what investors fear.  Hence the change in thinking from a growth stock to a ..... well, the author said a value stock.  I am not sure I would use that label either. 

 

People have to remember that Apple was a nothing company before the I-Phone.  Oh sure it had the Mac and a cult following, which sustained the company but did not provide it with relevance or growth.  And now the I-Phone is a commodity, which gives Apple no business model and no plan.  If this is right or wrong we will know in 12 month or so.  Place your bets and spin the wheel. 

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please show an apple phone with your article.
Apr 10, 2013 11:36AM
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A 13-hour old article without blog comments should qualify as a response to this article. No one will remember Apple in 5 years, it died with it's founder.
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