The AAPL Sell-Off Makes It a Screaming Buy

Apple‘s (NASDAQ:AAPL) stock is in a full-blown correction, dropping more than 15% from its most recent peak. The decline to about $545 a share from an all-time closing high of $636-and-change has wiped out $92 billion in shareholder value — almost the entire market cap of (NASDAQ:AMZN).


Nevertheless, Apple is hardly a sell at this point. In fact, it’s a screaming buy — and not only because of the stock’s bargain-basement valuation. After all, we’ve seen this kind of profit-taking in Apple before — three times in 2011 alone. So be prepared for déjà vu all over again once the big guns dive back into the trade.

For example, Apple sold off sharply heading into earnings last month, but then the company’s blowout fiscal second-quarter results — in which earnings nearly doubled — at first looked to have quashed the doubters.

“Revenue, margins & EPS jumped significantly, well beyond expectations,” wrote Indigo Equity Research analyst N. Landell-Mills in a report to clients. “Apple is maintaining strong momentum, with the ‘halo effect’ becoming more pervasive. As a well-managed and high-growth company, the valuation is cheap.”

Yet, in a pattern reminiscent of last year’s moves, the gains didn’t last. Have a look at the charts and you’ll see that shares in Apple flopped repeatedly in 2011 — and each case was a buying opportunity. The stock plunged 13% from late July to early August, 11% from mid-September to early October and 14% from mid-October to late November.

And by year’s end? Apple posted a 23% return, beating the broader market by more than 20 percentage points.

So what’s driving these sell-offs, both past and present? Partly, it’s because Apple is a massive, liquid winner, and in-the-money plays offer a way for anxious, defensive-minded investors to take profits and raise cash. Note well that even after its correction, Apple is still up 33% for the year to date.

Don’t underestimate the power of profit-taking in a market that has taken a decidedly bearish turn. After gaining as much as 13% this year, the S&P 500 is now struggling to hold on to low-single-digit percent gains. Apple is hardly immune to the risk-off trade. Indeed, as a fountain of paper gains, it’s bound to get caught in the ongoing bear rush.

“The usual suspects — including increased concern about slowing in Asia, the sovereign mess in Europe, along with a vision of a fiscal cliff and the election ahead stateside, coupled with a likely blast of prudent profit-taking from those who rode the S&P500’s near-30% run-up from last October — have taken a near-term toll on market sentiment,” notes Oppenheimer Chief Market Strategist John Stoltzfus.

If big stakeholders such as hedge funds are booking hard-to-find gains in anticipation of reentering the risk trade at a cheaper point later on, last year’s roller-coaster trading pattern is in effect — and we’ll see a reversal to the upside in the not-too-distant future.

Certainly, the valuation provides ample support for future gains. The correction has made an already cheap stock look like a screaming bargain.

Apple now sports a forward price-to-earnings ratio (P-E) of 10. That’s about 25% below the forward P-E of the S&P 500, and yet Apple is forecast to post double the long-term earnings growth of the broader market. Heck, shares are trading at a 25% discount to their own five-year average by forward earnings and by a nearly 50% discount to trailing earnings.

Meanwhile, the shares have ample sparks ahead, notes Hilliard Lyons analyst Stephen Turner. “Long-term catalysts include continued strong global sales of the iPhone 4s and iPad, an expected fall launch of the iPhone 5 and the eventual carrier addition of China Mobile,” the analyst writes.

This latest sell-off in Apple’s stock, too, shall pass, making today’s levels an opportune time to initiate positions or average into existing ones.

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