Trading in the second quarter ended Friday. Despite the increased volatility and back up in interest rates over the last six weeks, equities have had a very good first half of the year. One stock that has not participated in the rally is Apple (AAPL). After falling some 20% in the first quarter, the tech giant's stock fell more than 10% in the second quarter. However, there are good reasons to believe the third quarter will be kinder to this fallen one-time investor favorite.
Some floors seem to be in place:
First the stock starts the second half of the year close to the $385 level it bounced off on April 19th. Second the shares yield over 3% to start the quarter which some value investors use as a "threshold" for selections for income portfolios. In addition, now that quarter end and first half "window dressing" has come and went, selling pressure should lessen.
Important Analyst Upgrade:
Other than the rally in the overall market to start second half trading Monday, Apple shares are being buoyed by an upgrade by Raymond James from "Buy" to "Strong Buy". The team at the analyst firm also upped its price target to $600 a share on Apple, more than 50% above the price of the stock to begin the third quarter. Among reasons cited for the upgrade were the following:
- The "Horrible" sentiment on the stock probably caps the downside to the shares from a contrarian perspective.
- A deal with China Mobile (CHL) could significantly help the shares. NOTE: Others have speculated on this before and it seems the chatter has picked up recently, and this makes too much sense for both companies to not place a high probability on this happening at some point in the future in my opinion.
- One of the more interesting reasons for the upgrade is the opportunity for "expanding the Apple iOS ecosystem through autos, televisions and other devices." Although there have been many comments about an Apple "iTV", an expanding ecosystem is a possible value driver that seems missing from most analysis. The company should take in some $5B in revenue from its AppStore alone in 2013.
This follows Jeffery Gundlach's, who correctly called for the stock's decline near its top, comments last week calling the company "a cash flow machine" and saying it is now a good risk/reward play.
Valuation & Other Catalysts:
The company reports earnings on July 22nd. Given how much consensus estimates have come down over the last three months (From $9.38 a share ninety days ago to just $7.32 a share currently), the potential for an earnings beat seems fairly high. The iPhone 5S launch should also help shares later in the year. More importantly, the stock is one of the cheapest large caps in the market right now at under 9.5x forward earnings (less than 7x if you subtract cash & marketable securities) and sports a minuscule five year projected PEG (.48) as well. Finally, the company will be buying back an average of ~$2B monthly of its shares through now and the end of 2015 based on its $60B repurchase program. Given Apple's cheap valuation, solid dividend yield, horrid sentiment and possible catalysts, I believe it is a terrific risk/reward play here and I added to my position when the shares dropped under $400 last week. BUY.