Apple

5/28/12

                  After the markets trended lower for three straight weeks, they finally reversed course and closed higher for the week, with the Nasdaq up more than 2%, helped by a $30 rally in Apple on Monday and Tuesday.  While I think the markets may have found a bottom, I would not go buying stocks hand-over-fist right now.  Treasuries are still very bullish, copper and oil and going nowhere but lower and the euro is having all kinds of problems.  Both commodities and the currency are very bearish for stocks and unless Europe miraculously turns around, I continue to see a rocky road ahead for the stock market.  With all of that being said, I am not going to recommend buying the TLT this time, like I have every week, because I think it’s near a top as it’s failed to push through to new all-time highs, much like the treasuries have.

                  This week, I am recommending a stock that everyone in the world knows about and if you don’t know about it, you’re living in a box.  I’m recommending you buy stock in the single greatest growth, retailer, wholesaler, distributer, and technology company the world has ever seen.  Yes…the stock I want you to buy is none other than Apple (AAPL).  I know you’re probably thinking, “how the hell can I afford to buy Apple when 1 share is $562.29?”  But that actually happens to be the exact reason I want you to buy it and I will be explaining to you why it may actually be the best bargain in the market today. 

                  Whether you can afford 1 share or 100 shares, I want you in this stock.  While Friday’s close of $562.29 is a good entry price, if the market sells off you’ll get an even better opportunity.  My advice is to start buying on the next day the stock sells off, and buy all the way down until $520.

                  Apple is currently trading at about 10x forward earnings, with FY13 estimates coming in at around $54/share.  I think that is way to conservative, considering Apple is on pace to make about $53/share in FY12.  Those estimates are only expecting a 1.8% increase YOY.  That would be nice except that on average Apple has increased their net income by almost 50% over the last five years.  Using these numbers, Apple should be able to earn a whopping $80/share in FY13.  Given that they are coming out with the long anticipated iPhone 5 during this holiday season and with the rumored Apple television that will link all Apple products together, and with continuous innovation in their iPad lineup, I think $80/share is pretty reasonable.  Using a P/E of 10x, Apple should be trading for $800, not $562.  That gives you at least another 42% of upside potential.  If you think my price target is too high, think about this: Apple’s average P/E over the last 5 years is 14.  Using that multiple, Apple is a $1,120 stock. 

                  I’m not the only one that thinks this way.  There are currently 21 strong buys, 25 buys, 4 holds and 1 strong sell.  The one sell is an analyst at RBC Capital who downgraded Apple to “underperform.” For those who are unfamiliar with that, it means the analyst expects Apple to underperform the broader market.  Considering that Apple has consistently outperformed the broader market, I would say that particular analyst got short and is getting blown out badly on the stock.  Apple also has the balance sheet to back up its valuation.  Its PEG (Price-to-earnings growth ratio) is a measly 0.61.   A few months ago they announced they will be paying out a roughly 2.5% dividend to use up some of it’s $100B in cash, to go along with 0 debt. 

                  Looking at the chart for Apple, I think the stock put in a double bottom at the $520 level that it reached on May 18.  That just about matches the low put in on March 6, making it a double bottom.  Since May 18, AAPL has rallied about 8% off that low and has put in an inverted head-and-shoulders on a daily chart.  Additionally, if you look closely at the same daily chart, you will see that Apple put in a 5^th wave down, with its May 18^th low, from the highs of 644 (See previous reports for explanations of Elliot Waves).  It’s also pretty safe to say that Apple has bottomed out at $520, with the 61.8% Fibonacci retracement being at $516.60 (again, see previous reports for explanation of Fibonacci numbers). 

                  Apple is a stock that should be in everyone’s portfolio, and its finally come down enough to warrant buying again. 

Full disclosure: I am currently long AAPL.

Jeff Lewison