Seeking Alpha
Long only, deep value, growth at reasonable price, portfolio strategy
Profile| Send Message|
( followers)

Given the way Apple (NASDAQ:AAPL) has been trading the past we days, it is surprising to not see many articles on Seeking Alpha or other places supporting the stock and the buying opportunity it presents right now. Where are you all, the Apple bulls and the valuation fans?

By now, most Apple investors know the slingshot theory coined by Jason Schwarz. The more the stock "gets" pulled back, the more the joy when riding it back up. The theory is that the big funds and institutions try to get the stock as low as possible so they can get in cheaper ahead of the next run up. We believe the fall from $644 to the current price level of about $565 is a great buying opportunity, for a number of reasons, some of which are given below.

  • Current PE: Apple's current PE is less than 14. Our portfolio has (reasonably) slow growing dividend paying stocks like Philip Morris (NYSE:PM), AT&T (NYSE:T), and Merck (NYSE:MRK). Guess which company has the lowest PE in ours ? Yes, you guessed it right. The company that is growing at 70 to 80% easily. The last few times the stock traded at this level, it promptly shot up, backed up by great earnings. Agreed Q3, is not going to be as big as Q1 and Q2. But the way the stock is treated right now looks as if the company might report a loss in the upcoming quarter.
  • Analysts: Some of the most successful Apple analysts like Philip Elmer-DeWitt and Andy Zaky believe buying Apple at $550 will be like buying Apple in 2009 at $80, based on the earnings growth in the time period. Remember, these are not analysts who work for the big firms. These are people who literally specialize in Apple and its stock.
  • Future PE: Apple's trailing twelve month [TTM] EPS is $41. And the company said it expects to earn $8.68 per share. Everyone knows about Apple is notorious for sandbagging. Apple's average beat (of analyst targets) over the past 4 quarters is 22%. Let us be very conservative and assume the company reports just $9/share in each of the next two quarters, giving a TTM EPS of $45. That is a depressingly low number but even that EPS for a multiple of say 14, gives the stock a $630 tag. Assuming no new product or refreshes ! Clearly, it is the big boys pulling the stock down.
  • Dividends: Yes, the dividend news is already public. But one cannot deny the fact that the funds will start buying the stock as the dividend date nears, which can be anytime after July 1, 2012. With Apple's $112B cash, it is very safe to assume the dividend will keep going up as time goes on. And if the stock falls to $530, the yield works out to 2%, which is much higher than say the 1.6% International Business Machines Corporation (NYSE:IBM) offers. And remember IBM has been paying dividends for 50 years now.
  • Technicals: During Apple's magic from Jan 2012 till the recent slump, every bear was pointing out how the stock was going parabolic and the RSI indicator said it was extremely overbought. Not many have noticed or at least mentioned how the RSI is recently. The chart below answers it. The stock is almost entering the under-bought level.


(Click to enlarge)

Conclusion: A $50 EPS for 2012 is not out of reach for Apple. It needs to report about $11 per share the next two quarters to achieve it. While no one has a crystal ball, one can at least pessimistically assume $45/share TTM EPS to go with a below par PE of 15, which gives $675.

To put things into perspective, the Dow Jones Industrial Average is trading at a PE of about 15. S&P 500 is trading at almost 17, while Nasdaq is at 20. And which company was it that propelled the latter two indices the first 4 months in 2012 ? Cough, cough, yes it was Apple.

Disclosure: I am long AAPL, PM, T, MRK.

Source: Apple Slingshot In Full Effect