Apple: New Analysis Offers Reasons For A Rally

Feb. 5.13 | About: Apple Inc. (AAPL)

Introduction

Like most everyone else, I've watched the gyrations and the rise and fall of Apple Inc. (AAPL) over the past year. In the past month or so, I've been thinking about buying a few shares, but didn't since I've been listening to the street, and the opinions have been contradictory and have ranged from ugly to scary to exuberant. The APPL saga has become as much of a human interest story as it's a global investment story.

Like most investors, I typically look at a company's chart for some final guidance before pulling the trigger, but in the case of AAPL, viewing its chart only added to the dilemma of what to do. The only thing conclusive in the chart was its top of $705 but there were no comforting support levels.

And in terms of fundamentals and the overall metrics, there's so much out there on AAPL that one could suffer paralysis from analysis. In essence, the metrics and the analysis of them were, and continue to be, "dilemmatizing."

Then, when you add the opinions and recommendations of analysts, the uncertainty of what to do increases even more. Specifically, my angst went off the charts when I learned that only a few analysts were aware that the recently reported Q1 2013 was one week shorter than the same quarter a year earlier. By not factoring in this tidbit of critical info, AAPL failed to meet expectations, so on the earnings release date, it suffered its biggest one day loss in four years. Those familiar with this issue have suggested that the statistical magnitude could be 4.2% on earnings and 4.8% on revenue. Hard to imagine.

So, out of frustration, I conjectured that perhaps it's OK to be a student of the obvious by analyzing what's being "felt" about AAPL, and I've concluded that the "focus" toward it has changed. It appears to me that the focus is now to look for reasons for AAPL to rally, instead of declining further. This new focus is in its very early stage which is a good thing for investors looking to jump on board.

We humans can change focus and opinion quite rapidly and the change brings with it a renewed sense of zeal which contradicts the previous position. While this change is virtually impossible to quantify, the "feeling" is quite real and it's begun to permeate the psyche of investors. At least in the short term, the new AAPL reality is that it'll go up from here....not down.

In my view, investors should embrace this new focus, and benefit from it by buying shares of AAPL. A 15% to 20% gain in price would seem inevitable and easily attainable in a relatively short period of time.

Was the Great Decline Based on Facts, Fiction or Focus?

Since mid September 2012 when AAPL hit its all time high of $705.07, analysts, pundits and investors began to focus on all of the reasons for the share price to fall. And, as we now know, it fell in the grandest of fashion to its current close of $453.62 on 2/1/2013, thereby racking up a truly impressive loss of 35.7%.

It's astonishing that in a period of around 120 days, AAPL suddenly became 35.7% less valuable while reporting a 17.65% YOY increase in revenues as well as other impressive gains in metrics. But none of this really mattered, since the course of decline had been established by the focus. Plus, the risk/rewards of further upward price movement didn't make sense. It's all so simple in retrospect.

Simply stated, this decline was inevitable, because the focus switched to all the reasons for the shares to go down instead of up. It became a self-fulfilling prophecy, and the fundamentals, the technicals, the Company guidance (or the lack thereof) all were interpreted to reinforced the negative focus.

Now The Probability Of Making Money On the Long Side is Greater Than the Short Side

All things considered, I think it's pretty obvious that it's now easier and more likely for one to make money on the long side of AAPL than on the short side. Also, I think the following stock market maxim is especially relevant: A stock will always move in the direction where the most damage can be done.

Applying this thought to AAPL, one must conclude that the next move is up. After all, how much more damage can be done on the downside? The answer is not very much when you compare AAPL's fundamentals to the ratios that the market covets and lives by. For example, could you expect it to trade at a PE of 6 or 7 while yielding 3%, 4% or more in dividends? I don't think so.

There Are Plenty of "Facts" to Support The New Focus:

Facts alone don't always have the results intended, especially if the facts don't agree with the focus. But assuming the focus on AAPL shares have changed, here's a bullet point summary of some facts supporting the new focus.

  • AAPL has around $100 billion in net cash, which is about $105 per share.
  • AAPL is really a $348 stock ( The $453 Closing Price on 2/1/2013, less $105.00)
  • AAPL at an adjusted $348 share price is then trading at 7 times earnings (about ½ the market.)
  • AAPL at its current price, net of cash, is less than six times cash flow per share.

(In terms of generating cash, AAPL is like a bottomless oil well or a massive gold mine. It's like they have a license to print money. In the most recent quarter its operating cash flow was $23 billion, which translates to about $24 per share.)

  • Last quarter sales were up 18%
  • Sales in China were up 67%
  • A 71.42% Market Share of Tablet Sales in China
  • APPL attained the milestone of No. 1 mobile phone vendor in the U.S. in Q4
  • iPhones revenues rose 28%
  • iPads revenues rose 22%
  • It's likely that APPL could soon conclude a deal with China Mobil, Ltd
  • It's likely that APPL could soon announce a major innovation like Apple TV
  • It's likely that APPL could increase its share buy-back and increase its dividend

Here Are Some of the Perceived Negatives:

It's interesting to take a look at some of the perceived negatives that have circled around AAPL, compare them to the positives, and then really digest their relevance:

  • APPL may be losing its innovative edge
  • Phone sales growth is slowing as competition increases
  • Profit margins may continue to shrink
  • AAPL may be more of a Value Story than a Growth Story

Conclusion:

I'm not a contrarian. The scales have tipped to total dis-equilibrium with respect to the shares of AAPL, and that's why the focus has changed. My focus has also changed, so I'm buying a few shares of AAPL right away because I believe they're going up from here.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.