1. Changing perception
Due to competitive pressure and a lack of hype-inducing products, Apple is no longer a growth stock. It is making the transition to a value stock, hence the selling.
Growth investors are comparing future growth with past growth, which makes future growth appear weak. The original growth investors are selling shares in their search for the next big thing, but value investors have not yet embraced Apple Inc. (NASDAQ:AAPL). This change in perception may take some time, but when it does, prepare for a rally.
2. Record results
Apple posted record quarterly revenue of more than $54 billion and a record profit of just over $13 billion in its fiscal first quarter. This was the result of nearly 50 million iPhones and 23 million iPads sold during the quarter — not to mention the more than $2 billion in revenue just from the iTunes Store, with record sales of music, apps and videos.
Any other stock would have soared on these stellar numbers. But as mentioned, Apple Inc. (NASDAQ:AAPL) is a victim of its own success, which has brought it with unrealistic performance goals. Once long-term value investors drill into these numbers, they should embrace the stock.
Apple produces a 2.5% dividend yield that could easily spike if the company decides to deploy its cash hoard. Apple has seen recent pressure from hedge-fund manager David Einhorn to release more of this money to shareholders through a proposed high-yield preferred stock program.
4. Cash stockpile
With its $137 billion of free cash and investments, Apple could just about weather the apocalypse.
But the majority of these funds are held overseas, and it would probably take a change in tax laws for them to be repatriated. In the event of such a change, these funds could take the form of share buybacks and dividends. That could increase share value in the eyes of value investors.
5. Potential disruptive products
Remember, we are talking about the company that created the iPhone and iPad. These set a strong precedent. Imagine the hype and stock rally if Apple Inc. (NASDAQ:AAPL) unveils another incredible product.
6. High margins
Apple’s profit margins are the highest in the smartphone business. The company boasts a 58% margin, which compares with 43% for Research In Motion Ltd (NASDAQ:BBRY). This provides a tremendous competitive advantage.
Risks to Consider: Many analysts consider Apple products to be overpriced, with a rapidly fading “cool”factor. In addition, the company’s market share in the smartphone category is slipping slightly due to competition (not to mention that the original driving force behind Apple, Steve Jobs, is no longer around to motivate the company to new heights). Always use stops and position size properly, no matter how much you believe in an investment.
Action to Take –> As long as the stock holds above the 200-week simple moving average of about $375, I like Apple as a buy with an 18-month target price of $550 to $575. Remember, the stock could go easily go higher if Apple introduces another disruptive product or begins to deploy its cash hoard.