Apple Inc (AAPL): Falling Knife or Rubber Ball?

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The bull case
The arguments for buying the stock are equally plentiful. Under this scenario, the current sell-off can be seen as a “bear trap,” drawing in those with a negative view before the stock runs higher. Even Google Inc (NASDAQ:GOOG), which has not experienced the same correction that has plagued Apple Inc. (NASDAQ:AAPL), cannot boast the same low P/E multiple; at 11.4, Apple currently trades at roughly half of Google’s 22.4 P/E. One might argue that the discrepancy is warranted given Google’s dominant position in the smartphone market share race, but Apple’s fundamentals are simply too strong to overlook. Google is a must-own stock without question, but the greater near-term opportunity is Apple.

Perhaps more important, Apple Inc. (NASDAQ:AAPL) is expected to turn in its typical guidance beat next week when earnings are released. Where the company’s guidance is for earnings per share of $11.75, the average sell-side analyst estimate is for $13.46 and the independents have it at $15.11, according the research of Fortune reporter Philip Elmer-Dewitt. Apple has a long history of under-promising and over-delivering, so an earnings beat will hardly come as a surprise to anyone.

From a trading perspective, however, the earnings release may be critical. On one hand, if the stock’s downward inertia wins the day, earnings may be a case of “sell the rumor, sell the news.” On the other hand, investors who have moved to the sidelines are likely looking for the right time to get back into the stock. Positive earnings news may be the excuse that these investors need to flood back into the stock. This could drive shares rapidly higher and leave you wondering what you were waiting for. Recall from above that the average price target remains at $728. Does this mean that those analysts have remained positive, or are they just slow to update their targets?

I like the rubber ball scenario, and I’d would be a buyer anywhere near $500. The stock’s ability to quickly shrug off the sub-$500 close suggests that the stock is stronger than you might have thought. At current levels, I maintain that the upside disproportionately outpaces the downside.

Despite its recent backslide, Apple Inc. (NASDAQ:AAPL) has been a longtime pick of Motley Fool superinvestor David Gardner, and has soared 215% since he recommended it in January 2008. David specializes in identifying game-changing companies like this long before others are keen to their disruptive potential, and he helps like-minded investors profit while Wall Street catches up. I invite you to learn more about how he picks his winners with a free, personal tour of his flagship service, Supernova. Inside, you’ll discover the science behind his market-trouncing returns. Just click here now for instant access.

The article Apple: Falling Knife or Rubber Ball? originally appeared on Fool.com.

Fool contributor Doug Ehrman has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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