Apple Chart

Apple (AAPL) stock has been under some pressure.  There are a number of interesting issues, nicely laid out by Barry Ritholtz in his commentary on the recent price action.

Should we pay attention to this or to the fundamentals?  What about the stock options controversy.  Take a look at Barry’s view, and then consider some other thoughts.

Link: Apple Chart.

I am a big fan of Apple for many years — like the company, the iPod, the Macintosh, and even some of Steve Jobs’ schtick. But looking objectively at the chart, this is a stock facing some problems: a series of lower lows, possibly pulling back towards …

OK, the chart shows that there has been selling.  There is a lot of hot money, and we believe that it often drives things to extremes.

These actions should provide opportunity, if one has confidence in the fundamentals.  I like the stock, I own the stock, my clients own it, and my funds own it, so I am "talking my book."

Apple is in the center of a change in how people get information.  Here is what I wrote to my investors a few days ago:

1)  The company has about $11/share in cash.
2)  Earnings growth from 2005 – 2006 was about 45%.  Growth from 2006 – 2007 will be about 30%.  2007 earnings are expected to be about $2.75/share.

Determining the long-term growth rate is important, since that influences the PE multiple that the market is likely to accord the stock.  Some see the long-term growth rate at about 20-25%.  If that were true, the earnings multiple might be about 30 times 2007 earnings.  This implies a price target of about $94/share (30*2.75 + 11 cash = 93.50).

My view does not depend upon some delay in IPod shipments or a product transitions.  I leave that to those trying to catch small moves.  The real play here is for the "halo effect" where customers go into an Apple store and also buy a Mac.  It would take very little to get a nice earnings bump from that.  They always seem to have other new ideas, so the long-term growth potential is better than most tech stocks.

What about the options controversy?  If one thinks that something immoral was done and prefers not to invest in companies on that grounds, I respect that view.

Personally, I just look at the numbers.  I do not think management will be changed.  I do not think that anything the company did several years ago has implications for current behavior.  I do not think that any costs or charges will be significant to the stock valuation.  Ergo — those influenced by such factors are giving me an opportunity to add to my position.

I emphasize that this stock discussion is here for the purpose of illustrating an analtyical method.  Please read our disclaimer.  It is not a recommendation to buy Apple stock, since it may not be suitable for all investors.

It is a wonderful example of how the current market negativity presents opportunity.

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