It would be nice if we could attach an electric shock button to our computers that would zap us each time we try to buy more Apple (AAPL). That might be what it takes to hold us off until the end of hedge fund vacation in first week of January. According to the top notch research of Andy Zaky and Horace Dediu, two of our esteemed presenters at the 2012 Apple Investor Summit (www.appleinvestorsummit.com), Apple is on the verge of reporting the most spectacular earnings in company history. Because of the stock’s depressed p/e, the probability of a dramatic stock rise post earnings is elevated this time around. We figured this scenario would play itself out as soon as Apple missed on its earnings last quarter because of the delayed iPhone 4S release. Rather than interpreting that miss as weakness, we believe it should be interpreted as pent up demand to be manifest in the holiday quarter. There is a chance that this January report will represent the beginning of a period that we are calling ‘The Apple Apex’. 2012 will be a unique year because Apple’s current products are still selling better than expected and yet there is enough optimism in the product pipeline to keep investors consumed with positive uncertainty. Catalysts such as iPad price fragmentation, Chinese growth, iPhone 5 on 4G networks, and a possible stock dividend when Apple reaches $100 billion in cash are capable of propelling Apple to $500 a share and beyond.
The one variable that could derail the Apple Apex from happening is Europe. Despite consensus opinion to the contrary, the European crisis is under control and is no longer an actual crisis. Men like Tim Geithner and Jim Cramer along with ratings agencies like S&P and Moody's want Europe to attack the problem with shock and awe similar to the methods utilized in the U.S. financial crisis but Geithner, Cramer and the rest of the euro bears will soon come to the realization that Europe is different. The root cause of this mess is something that the U.S. hasn’t dealt with... its socialism. In order to ween the European people from its socialistic policies of early retirement and long vacations, government leaders must maintain pressure points in the economic system to force the people into action. As long as we have a coordinated backstop to prevent a European banking collapse, which we do, the market will learn to co-exist with such pressure points and recognize them for what they are. Weening a society from socialism is not easy. Neither is it impossible. It is happening before our eyes thanks to the leadership of Angela Merkel and the backstop of central bankers like Ben Bernanke. Europe should be closely monitored but the fear of contagion has been taken out of context. Europe is too big to fail and the euro isn't going anywhere.
We anticipate the Apple Apex will be defined as a time when Apple’s p/e compression comes to an end and the stock is able to run alongside the company’s growth at a 10-15 p/e. Even without any p/e increase, this stock will rise substantially because of the 70%-90% growth that will continue for the foreseeable future. There is no question Apple’s p/e has been hampered by the U.S. financial crisis and the European sovereign crisis and yet the stock has remained the best investment vehicle on Wall Street. As I mentioned in a prior www.economictiming.com post, Apple began the year at $325. At its high it was up $100 in spite of the European crisis. Any idea where high multiple stocks like Amazon (AMZN) and Netflix (NFLX) began the year? Amazon began the year at $181, it currently trades at $181. Netflix began the year at $175, it currently trades at $69. The S&P 500 began the year at 1257 and now trades at 1219. Apple investors are currently in a bit of a funk because we only got half of the expected run from the November 28th low but rest assured, the second half of that run is coming in early January. We still plan on holding off as long as possible before adding to current Apple allocations because of the sitting duck environment that exists during the second half of December, but like I said, an electric shock might be required to keep me from pulling the trigger early. The prospects of 2x and 3x on call options is tempting from current levels but we are going to wait for one more European bear drop that could possibly hit the market on a low volume day. When that happens, it will be time to buy.
Disclosure: I am long AAPL.