Why I think Apple stock is a good buy right now

I’ve been trading Apple stock for the better part of the past decade and it’s been a long time since I’ve been this compelled to buy Apple stock (AAPL). The fundamentals are just so overwhelming that I simply can’t ignore it anymore. Here are my thoughts:

Profit to Earnings Ratio (P/E):

Apple is currently trading at a P/E of 15.87, which is the lowest I can ever remember seeing it. The P/E ratio is calculated by taking the stock price ($332.86) and dividing that buy the stock’s earnings per share ($20.98). So, if you take $332.86 / $20.98 you come up with 15.87.

Why is this important? Well, people often get hung up on the stock price itself. Apple is trading at $332.86 and that is the only thing most people focus on when looking at stocks. When a stock’s share price gets this high people often think “That’s an expensive stock”. The reality is that it’s the same exact price as a $33 stock with $2 per share earnings.

Apple traditionally trades in the low – mid 20’s P/E range. If you take this into account, the stock would be trading at $472.05 when using a P/E of 22.5 or $524.50 at a P/E of 25. There is an amazing article at Seeking Alpha about all this. Here is another article at Fortune about this.

I have no reason to suspect that Apple’s EPS will go down in the near future. In fact, they continue to gain market share and have increased earnings year over year for as long as I can remember. Also, don’t forget Apple’s sick cash position; over $85 of each share is CASH.

To me this is reason enough to buy the stock. In fact, I would say this is the single biggest reason I’m buying the stock, but there are other reasons…..

The Chart Is Compelling

I think people who trade based on charts alone are crazy, but they can be good supporting data in the correct cases. Take a look at Apple’s chart below and you’ll see that it’s been trading in the narrow range of 320 – 360 for the better part of five months. With the stock hovering around 330 right now, this is a quadrupedal bottom at this price, something chart analyst would buy on alone. So, I feel VERY safe picking the stock up at these levels.

Apple Chart

Apple Chart

Big Announcement Coming?

I was reading MacRumors today (something I do several times per week) and this post caught my eye. It looks like they are planning some crazy announcement this weekend that they are going though great lengths to protect the nature of. Now, this could be totally nothing at all, but it could be something crazy big too. Maybe some revolutionary new product none of us see coming? This alone wouldn’t be reason to buy the stock, but it was the reason I started looking into it again. Look at what Apple is doing to prepare for the event this weekend:

– There’s an overnight shift planned for around 10-15 individuals at each Apple Store to work from late Saturday all the way through mid-Sunday.
- During the overnight shift, it’s going to be required that employees lock cell phones in the main office. They will also have to sign an NDA with Apple.
– There are a wide variety of roles, we’re told, for the overnight shift. This includes all visuals staff, a manager, a business team member, a few Genius team members, one back-of-house employee, and a few generic Apple specialists.
– Apple stores have apparently already received hardware to install, and are expecting more hardware to come on Friday or Saturday. All materials that Apple stores have received have been instructed to be under lock and key until after close on Saturday night.
Apple employees will be putting up black curtains at all stores so that people walking outside cannot see inside.
Employees have had to download gigabytes of data from Apple corporate labeled, “training” in a password-protected zipped folder that won’t accessible to managers or anyone else until Saturday afternoon.
– Lastly, all Apple retail stores have mandatory meetings on Sunday, May 22nd. Most meeting are scheduled for the morning, but there are evening meetings as well.

The Play:

Over the next several days I’m going to be picking up Apple Leap options and buying several shares of the stock in a long position. My first trade was to buy the Apple Jan 2012 320 Call options at 41.50. My next trade will be to pickup 100 shares of the stock with a limit price of 332.50. After that I will pick some more options up. If I don’t have these orders filled by Friday I will just put in market orders to build my position before this announcement. If the announcement is nothing special, then I will continue to pick up shares and options in Apple slowly. I like spreading my trades out to prevent short-term variance. If the announcement is big then I will already be a step ahead. I will then evaluate how to buy more stock after the announcement.

*** I’ve watched CNBC enough to know that I have to say I’m long in AAPL and that my opinions within are by no means a recommendation to purchase stock or options in Apple Computer.

5 Comments

  1. Not a bad day for your portfolio!

    Reply
  2. Great!! Your prediction come true :-) Now Apple shares are 600+. I caught your article just now and now thinking why i did not go through this article back in 2011. Do you think its still a good choice to go for Apple stocks when it is 600+ now?

    Reply
  3. Apple stock price is worth every penny, that’s if you are smoking the right stuff.

    The insanity of the speculative markets continue to be cheered by deceptive advocates who have made fortune but don’t acknowledge the actually cost to the United States future which is likely to see a declining standards of living in the year ahead . This is all done for a cause, so that a handful of people can make their billions by manipulating the stock market to show an illusion of prosperity returning to the economy.

    The analysts who are projecting Apple stock to reach $1000 a share are the likely the same expletive, which made though wonderful forecasts about similar bubble stocks during dot com bust.
    I would have like to use the actual word which best describe these analysts, but I probably would be censored.

    The rapid rise in apple stock price has nothing to do with current earnings but is based solely on speculative growth with GREAT EXPECTATIONS that sales growth will increase by 20% annually or more for the next five years. This is why the cheerleader believes apples stock is significantly undervalued even though it has increased by over 250% in the less than 2 years.

    If apple stock price continues to increase, don’t jump for joy. The continually increase is nothing but herd investing which has caused apple’s stock to increase by 56 % since the beginning of the year.

    It was not long ago the herd believed that house prices could never go down but would continue to increase rapidly year over year. Just as the apple cheerleaders believe its stock price cannot decline, but will continue to increase. As long as the herd believes the fairytales being promoted in regards to Apple’s sales growth its stock price will increase. As soon is its earnings and net income do not meet the ridiculous expectations it will drop.

    FACT:

    Apples 2011 net income is reported to be 26 billion on revenues of 128 billion. This is a 185% increase from Apple’s 2010 net income which was 14 billion. A good majority of Apple earnings came in the 4th quarter, I.E holiday season when it s gross earnings increased by about 18 billion from the previous quarters to over 46 billion. Unbelievable wouldn’t agree?

    The herd believes that Apple can expand it sales by 20% a year for the next 5 years is a deception. To accomplish this apple sales will have to increase to 153 billion in 2012 and by 2016 and have annual sales of 318 billion.

    I don’t know how the herd can believe this fabrication. I guess they are smoking some good dope.

    Based on last year revenue and the prediction that sale will increase by of 20%, Apple’s net income will not exceed 40 billion in 2012. Apple’s net profit is approximately 20% based on 2011 earnings and net income.

    Sales – cost of goods sold / sales = net profit
    128 billion – 102 billion / 128 billion ≈ 20 %

    2012 revenue if sales increases by a 20%.
    128 billion X 1.20% ≈ 153 billion

    2012 estimated Net Income from gross sales.
    153 X 20% ≈ 31 billion

    Every additional billion of net income will be more difficult to earn, due to its enormous size which is 1000 million. If the analyst’s 2012 forecast are correct Apple’s revenue will increase by 25 billion or 25000 million dollars. This amount of money buys quite a few Ipads, downloads and other apple products. How many more apple product can the market absorb?

    By comparison NASA Space Shuttle operating budget in it last year was 3 billion. I provide this as an illustration, to give the cheerleaders a clued about the staggering amount of income apple currently has.

    Apples net income from the past five years, from 2007 to 2011 is approximately 56.5 billion. A major jump in sale and income came in 2010 to 2011 when its net income increased by 11.91 billion.

    What is never asked is how a company with a net income of 26 billion in 2011 can have achieved a market capitalization of 590 billion. I realize there is a difference between market capitalization and the use of a capitalization rate to determine value. However, market capitalization is a qualitative value not easily determine as it represents the public consensus on the value of a company’s equity and in Apple’s case it had been inflated.

    The use of a capitalization is a quantitative method to determine value from quantifiable data such as income and expenses.

    It is relatively easy to determine Apple value utilizing its net income and a capitalization rate. Apple average net income over the last 5 years is 11.3 billion. This income average would typically be utilized to estimate a value.

    But let’s assume an unlikely scenario that Apple net income is 40 billion in 2012.
    If a typical capitalization of 10% is applied to this net income, a value for the company can be estimated:
    40 billion / 10% = 400 billion.

    But to entertain all the promoter of apple stock let utilize a capitalization rate of 6%. The lower the capitalization rate the less risk involved with the investment, consequently a higher value.
    40 billion / 6% = 666 billion.

    I did not calculate that number on purpose. However it is interest. Maybe, apple stock price is associated with one of the deadly sins – GREED. It certainly appears to be.
    I acknowledge the capitalization rates are assumption, but historically a 10% rate is typically used by investors. By this analysis Apple’s market capitalization appear to be in excess by at least 265 billion.

    Now let get to the 1000 dollar a share price which every analysts and his brother are saying Apple stock will achieve in a relatively short time. This will mean that Apple as a company is worth a Trillion dollars with a the capital recovery of more than 25 years on the money invested as Apple’s net income will likely stagnate at 40 billion, due to the enormity of that sum.

    Apple’s income growth is beginning to slow, but this does not stop the analysts from developing deceptive forecast about Apples future growth citing its relatively low market share of worldwide computer, Smartphone and Tablet sales.

    One must ask who is paying these analysts for these deceptive forecasts. Could it be the herd on Wall Street which severely damaged the US Economy by all the financial instruments which were developed, supposably to limit risk, but were merely another device which allows them to hedge their bets? .

    It’s not surprising that the 70% of Apple’s stock is owned by institutional investors. Apple as company is a great candidate to collude on, due to its incredible growth rate over the last 5 years and the difficulty in evaluating its most important characteristic which is the marketing of its products.

    Marketing is an intangible asset, akin to Goodwill which is very difficult to evaluate There is a reason, Apple’s sales are less than its competitor which is due to their considerably higher cost, which in many cases are functionality no better than their competitors. But if you listen to the experts, it’s like Apple has no competitors or competing products which the consumer can choose, but can only buy Apple products.

    I have several apple products, including an ipad which is nothing more than an oversize iphone. The Ipad functionality and interface are significantly inferior to a lap top. The appeal must be to the herd, which is high on something and give them a convenient place to watch video as its utility is more like a toy than a useful device.

    If Apple wishes to capture more market share of sales it will require developing additional products with lower prices as the more affluent market have been saturated, leaving the less capable market the task of buying all though millions products which are forecast to be manufactured and sold by apple in the coming years.

    Just as computers, big screen TVs and many other electronic devices have been commoditized, so will apple products if they wish to generated more sales. This directly related to Apple’s value and alleged income growth potential. Guess what else is affected by a lower sale price? That right earnings and net income will be lower, which is another reason Apple income will stagnate.

    I could go on about why apple stock is a bubble, but it would be in vain as the herd does not wish to sober up as the dope Wall Street is selling is that good. Maybe I need a toke.

    Reply
  4. apple is going to go down and not up. right now people are buying the stock only on the fact they believe the i phone 5 is coming out soon. It doesn’t really matter. Samsung is killing there business. Apple has missed on earnings in the first time in along time. Not because i phone 5 is not out its because samsung has a better phone with the galaxy. It is also cheaper. How much better is the iphone going to be over the last i phone not much. Its going to be a big miss and the start of there declining business. THere getting so desperate now there trying to sue samsung as they see samsung is taking over the industry. the fat lady has sung get out of apple while you can its going to go down to around the 500 mark where it belongs. Same sungs items are to strong. Apple is even cutting out of you tube as desperate attempt to compete with google. The lawsuit and the earnings going is just a trend this company is in trouble as a new competitor is taking over the industry. If anything buy samsung. They make a better phone at a cheaper price. Better quality and a cheaper price means a new walmart is in town. You can all dream apple will bounce back it wont. Its done unless it wins the lawsuit which they can’t.

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