The Most Misunderstood Stock on Wall Street: Apple

by Michael Shulman | March 17, 2011 5:00 am

With all eyes on Japan, and the market responding to the tragedy and nuclear threat with a massive sell-off, investors are being presented with the chance to pick up their top stock picks[1] at a discount. Despite its price tag north of $300, I think Apple Inc. (NASDAQ: AAPL[2]) is dirt cheap right now, making Apple stock perfect for the buy-and-hold investor.

AAPL has pulled back below $335, but is building a base for the next leg up. When will this happen? It could be when earnings come are released on April 19. It could occur in the predictable run-up to earnings. It could happen when the market breaks out to the upside. I don’t know exactly, but it will happen.

Apple is now selling at roughly one half of its historical valuation, and this is occurring for a variety of reasons, which stem from the fact that Apple is a misunderstood company and stock. Here’s why:

1. Wall Street analysts typically use BlackBerrys, made by competitor Research In Motion (NASDAQ: RIMM[3]), and Dell (NASDAQ: DELL[4]) PCs.

2. The company’s huge market cap, which is the second largest behind ExxonMobil Corp. (NYSE: XOM[5]). And, of course, ExxonMobil is a “serious” company, the equivalent of a “man’s man.” It brings stuff out of the ground, negotiates with governments, speaks with a Texas accent, and so on. On the other had, Apple only makes adult toys that no one actually needs — they just want them.

3. The belief that the company’s rapid growth simply has to slow.

4. Willful blindness. Despite being a second-generation product with modest evolutionary changes from the first generation iPad, the iPad 2 is sold out in Apple stores and at the website for weeks. Surveys show the iPad putting a serious dent in laptop sales, as evidenced by weak results at the Hewlett-Packard (NYSE: HPQ[6]) consumer unit last quarter. “No matter,” say the Apple naysayers.

Sorry, guys and gals on Wall Street, you are decidedly wrong. The paradigm shift from the central computer to the desktop PC was not believed on the Street either. Prime Computer Inc., a producer of minicomputers from 1972 until 1992, was the No. 1 performing stock in 1982, the year the IBM (NYSE: IBM[7]) PC hit the streets. What ever happened to good old Prime? And Digital Equipment Corp.? Burroughs? Univac? Control Data? Data General? I think I’ve made my point.

We are now seeing the shift from the desktop to the mobile device. Mobile means personal, even for people conducting business. And the keys here are the interface, ease of use, disciplined software and integrated applications. In a word: Apple.

In my humble opinion, the stock is dirt cheap here. The company’s gross margins are two to three times that of traditional computer makers such as Dell.

Furthermore, despite the soaring popularity of its iPhone, the company has a tiny market share in cell phones — less than 1% worldwide — meaning it has a great deal of room to run. If you bundle netbooks, low-end laptops and tablets together, it has less than 5% market share worldwide. And it has less than 2% market share worldwide in personal computers.

All this market share and a company that knows how to execute — sounds good to me. Apple doubled in size during the Great Recession and will grow during the next one (that begins in Q4 2011 or Q1 of next year, at least in the real world.)

I may be wrong, short term, on some movements of Apple stock, but I am not about the company. That is a done deal. Hard to believe, but with AAPL, buy and hold is back.

  1. top stock picks:
  2. AAPL:
  3. RIMM:
  4. DELL:
  5. XOM:
  6. HPQ:
  7. IBM:

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