Owning Apple right now can be frustrating to investors. The company’s fundamentals are in tact but the stock ($561) is trading at 8.2x FY13 EPS ($53.88). Even analysts predict the company will earn more than they thought three weeks ago with earnings estimates increasing. Investors need to keep the course, and take these opportunities to buy Apple on these sell offs.
Let’s examine three points.
First, investor psychology gets in the way, often, of a good investment. Investors get spooked when good stocks go down, particularly stocks that are this large (ie, several hundred dollars per share), have risen this far (ie up 50% in a year) and have a lot of chatter associated with them. I have written extensively that Apple should split its stock 10:1, and then investors would be able to understand the trading of ten $56.10 shares more easily than a share of $561. But, again, valuation metrics are the same whether you buy ten shares at $56.10 or one share at $561. Apple’s earnings power on the $561 share includes $117 per share in cash and is forecast to earn investors $53.88 next year. Investors are being offered an opportunity in the market to purchase a stock at 8.2x earnings (excluding cash) for a company that is growing 59% year-over-year in the last quarter. This attractive stock price is the explanation for its recent run. Despite the stock price appreciation, the stock price has still not caught up with the value of this company. According to a FactSet report published this week, the forward PE of the S&P 500 is 12.7x. Apple’s is 8.2x. This means that Apple, one of the fastest growing large-capitalization companies with an arguably terrific line-up of products, is trading at a 50% discount to the overall market.
Second, what is affecting Apple’s stock price right now has to do with the overall market, including concerns over Europe and employment numbers, to identify a couple. Historically, these extraneous events provide buying opportunities for long-term investors. Apple will get whipped around with the market as these issues settle themselves out. However, looking at shocks to the market over the past 4 years, including the demise of Lehman and Bear, fears of default in Dubai and Greece or rising oil prices, Apple, over time, has continued to trend up, over 5x in 5 years. If investors are interested in long-term investments, bad days mean better buying opportunities. Warren Buffet commented on CNBC yesterday morning that while most people don’t like it when the market goes down, he does because he can buy stocks he likes cheaper. Take this to heart with Apple.
Third, the Apple story remains intact. Outstanding products. Limited competition. Outsized margins. Consistently high growth. Continued innovation. Enormous cash cushion. Stellar management and execution. I have covered Apple for a long time. I first recommended the stock at $19. At that time, the naysayers poo-pooed Apple saying it was an iPod company and real technology was corporate IT. Then as Apple hit the $50s, money managers pushed back saying they had missed the story, without looking into what Apple had coming down the product pipeline. Then, that story repeated itself as Apple continued to appreciate - investors lamented that they had missed the opportunity. However, if one re-examines the fundamentals of this company, the fundamentals remain in tact. Please refer to Apple at $590: Another shot at a Good Deal and Apple at $580: Christmas in April for more on the fundamentals. Undoubtedly, there will come a time that Apple itself will be disrupted, but it does not appear to be anytime soon.
