Let the Day Traders Sell Apple — You Should Keep Holding

by Jeff Reeves | July 25, 2012 9:32 am

Well, by now you should all know that Apple (NASDAQ:AAPL[1]) reported a rare earnings miss[2] Tuesday evening. Shares sold off more than 5% after the bell, bounced back a bit but still were down 4% at Wednesday’s open.

I’ll cut right to the chase: If you’re a swing trader, it might be wise to consider Apple a trouble spot in the near term. But if you’re a long-term investor, this is one of the best positions to be in — so do not panic.

Regarding the short term, here are the risks:

• Earnings Miss: Apple showed revenues of $35 billion, and earnings per share were $9.32. That’s against Street forecasts of revenues at $37.25 billion and earnings at $10.35. Those are not rounding errors, but significant misses and a cause for concern for any company.
• Guidance: Worse, Apple guided lower than expected — revenues of $34 billion and earnings of $6.65 per share for Q4. This compares to the consensus of $38 billion and $10.22. More significant misses of expectations, and a clear admission of a disappointing short-term outlook.
• Macro: The global economic picture is bleak[3] — from Europe to China to a flagging “recovery” at home. Apple is not immune to these trends, and China is of particular concern since that has long been touted as a huge area of future growth beyond the earnings story.
• Sentiment: Apple is a crowded trade, and was up 48% year-to-date before this earnings report. That might have been too much too fast … meaning all the previous bullets could change this fashionable status fairly significantly.

Click to Enlarge Ugly stuff, right? No wonder Apple is down and could drift lower for a few weeks. But here’s why if you’re a long-term investor, you shouldn’t be shaken:

• Slower Growth Priced In: Consider that AAPL stock is predicted to earn $55 in 2013. That means if shares get in the $550 range, you are buying this tech behemoth for a forward price-to-earnings of 10. Like seemingly every investor on the planet, I dabble in Apple stock, and my most recent purchase was on a brief dip in May down under $550 for just this reason. I think that’s a great entry point for new investors.
• Forecast, Shmorecast: Keep in mind that Apple always provides low-ball guidance, and historically has played its cards close to the vest to “surprise” Wall Street. Consider that after its Q1 earnings in October 2011 missed[4], the company followed up with a 36% earnings surprise and saw profits soar 118% year-over-year[5] in Q2 numbers released in January. Shares were in the low $400s before that report … and jumped 50% in two months afterward.
• iPhone 5: The only reason you should really freak out in the long-term is if you believe the iPhone 5 will not be well-received. Yes, cheaper phones from companies like Samsung and other slick gadgets running the Google (NASDAQ:GOOG[6]) Android OS are legit competition to Apple sales. However it seems knee-jerk to think the brand power of Apple will evaporate overnight. If the iPhone 5 flops, then Apple will have a serious problem … but I certainly am not betting against AAPL just because of this one earnings report.
• Shrinking Field: You think Research in Motion (NASDAQ:RIMM[7]) or Nokia (NYSE:NOK[8]) will exist five years from now? Not likely. Do you think tech dinosaurs like Hewlett-Packard (NYSE:HPQ[9]) or Dell (NASDAQ:DELL[10]) will somehow create a great consumer gadget that takes Apple by surprise? Please. Even if you think Google will hang tough with smartphones and that the Kindle from Amazon (NASDAQ:AMZN[11]) and Surface[12] from Microsoft (NASDAQ:MSFT[13]) will be successful, there’s a huge and ever-growing pool of customers that an increasingly small group of gadget companies serve. Apple is not RIMM, people.
• Dividend: Apple will pay a quarterly dividend of $2.65 per share on Aug. 16. At $10.60 annualized, that’s a yield just shy of 1.9% at current valuations after the bell. Not burning down the house … yet. You can rest assured that Apple will boost that dividend going forward considering the payout represents less than 20% of future earnings. Furthermore, remember the headline yield is only applicable to new investors. If you bought at $400 a share in 2011, your yield on cost actually is almost 2.7%. Think about that.
• Few Growth Options: The bottom line is that if you want growth, there ain’t many options these days. Chipotle (NYSE:CMG[14]) is off 25% since ugly earnings[15], proving the momentum has stopped there big-time — and other momentum darlings are showing weakness. If you want to chase small-caps with higher risk, that’s fine. But Apple seems pretty low-risk to me consider its gadget dominance and the organic demand for smartphones and tablets in the long-term.

Jeff Reeves[16] is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[17] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a long position in Apple.

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