by Jeff Reeves | April 16, 2012 4:05 pm
Apple (NASDAQ:AAPL) is the darling of tech stock investors. The stock is up about 45% year-to-date and 550% in the past five years. The Apple iPad and iPhone are gold standards of consumer technology. Oh, and AAPL stock will start paying a dividend to the tune of $2.65 quarterly, starting in July, for a yield of about 1.8% on today’s prices.
However, Apple just tallied its fifth decline in five trading days with a hefty 4% slide Monday, giving up over 8% and helping hold back the Nasdaq while the other indexes rallied today (AAPL represents about 12% of the tech-heavy index). Even more startling is that while AAPL stock has been down, the market is essentially flat in the same period — a measly 0.2% decline in the same five-day stretch.
So does this mean the end of Apple? Is the tech giant finally overbought after its red-hot run?
Don’t bet on it.
Sure, last month BTIG downgraded Apple stock — but only to “neutral” and not to sell, and amid other firms raised their price targets as high as four figures. There are also concerns about iPhone pricing and the ability of customers to upgrade, as well as antitrust headlines related to eBooks sold in competition with Amazon (NASDAQ:AMZN).
But these headlines alone can’t stop Apple. I have been a big believer in Apple and made this stock one of my five “editor’s picks” for March. Shares are up 8% since that recommendation despite the recent slide, and I remain convinced that AAPL stock will keep moving higher after this short-term speed bump.
Why? Well, here are few reasons:
Cash Hoard: Apple is sitting on a huge stockpile of $30 billion in cash and short-term investments and another $67 billion in long-term investments. Even the $2.65 dividend won’t do much to erode that, paying out roughly $10 billion annually. Apple can easily cover that tab from net income from just a single quarter of operations, so the massive war chest is not at risk.
No Sales Slowdown: Revenue has tripled from 2008 to 2011, from $32.4 billion to $108.2 billion. Everyone keeps wondering when Apple will hit a wall, but the sales haven’t slowed yet. And with a much-anticipated iPhone 5 due out in the summer and the recent revamp of the iPad (along with the launch of an Apple flat-screen TV), you can expect revenue to keep moving up for some time.
Evolution in Leadership: Tim Cook is not Steve Jobs. The dividend and buyout plans prove that, as did the recent Apple event that unveiled the new iPad. But by many metrics Cook is doing as good or better of a job — even if it is a very different one. Stock performance has been strong and the product cycle appears to be humming along. The real question isn’t whether Cook can continue past successes but whether he can help Apple take another big step as it evolves beyond the house that Jobs built. It appears that so far, he’s showing his “operational genius” is just as crucial as his predecessor’s creativity. And for a $600 billion company, that kind of expertise in the corner office might be overdue.
Bargain Valuation: All this hasn’t caused Apple to outrun its earnings, with a reasonable forward P/E of about 11 right now based on fiscal 2013 forecasts! What, do we really think Apple is deserving of a P/E of around 8 or 9? How far do you expect this company to flow with earnings like that — especially given that AAPL stock regularly trounces expectations thanks to notoriously conservative earnings forecasts?
There always is risk in the stock market — after all, the five-day slide in Apple doesn’t make any sense to me looking at the fundamentals.
However, Apple stock is as close to a sure thing as you’ll find on this current pullback.
Maybe Google (NASDAQ:GOOG) and its Android-powered gadgets will start eating away at Apple’s market share soon, or maybe in time Apple will become a sleepy tech major like Microsoft (NASDAQ:MSFT), Hewlett-Packard (NYSE:HPQ) or Cisco (NASDAQ:CSCO) — more content with plodding along than innovating.
But that day has not come yet. Buy Apple stock before investors come to their senses.
Jeff Reeves is the editor of InvestorPlace.com, and author of “The Frugal Investor’s Guide to Buying Great Stocks.” Write him at email@example.com, follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the aforementioned stocks.
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