It's May all over again for Apple (AAPL) investors. This article was written back in May when the 'slingshot' effect was in full force. And almost 6 months later, history repeats itself. So, it's time to have a relook at things and realize how eerily similar the two situations are, though they are separated by 6 months. If things follow the same pattern as the last time, investors can expect at least the same 25% return we saw after the previous pullback. Let us get into the details.
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 $705 to the current price level of about $600 is a great buying opportunity, for a number of reasons, some of which are given below.
- Current PE: Apple's current PE is almost at 14, which is the same level it was back in May before rebounding violently. The company that has grown at 70% over the past 5 years and is expected to grow at least 25% over the next 5 years is trading at a lower valuation than stocks like Waste Management (WM). A current PEG of 0.62 lends credibility to the undervalued thesis. The last few times the stock traded at this level, it promptly shot up, backed up by great earnings.
- Analysts: As mentioned in the previous article, this time as well Andy Zaky has come out in support of Apple when the chips are down. For those who are not sure of Zaky's record, he has managed to call the bottom almost exactly each time in the recent memory. Once again, he has called for Apple to reach all time high of $1000 with the stock trading at a significant discount.
- Future PE: Apple's trailing twelve month [TTM] EPS is $42.55. And the company said it expects to earn $7.65 per share in 2012 Q4. Let us be very conservative and assume the company reports just $8/share, giving a TTM EPS of $44. That is a low number but even that EPS for a multiple of say 15, gives the stock a $660 tag, a 10% gain from current price level.
- Dividends: Apple's dividend yield of about 1.7% might seem too low to think that the hedge funds will start buying to get the dividend but the last time the stock went ex-dividend on August 8, it had shot up about 3.4% in a week just on the strength of the upcoming dividend payment. One can expect the same to happen this time as well, tentatively between November 1st and November 8, 2012.
- The Mini: With everyone and their grandma entering the table market now and competing on price, Apple has (almost) fooled them all with the upcoming mini iPad. With an all time high market share already, any worry of the competitors eating away at Apple's share is probably out of the window now. Sure, in classic Apple fashion the mini will cannibalize the 'bigger' iPads but it will make sure the majority of the pie still remains with Apple.
(click to enlarge)(Source)
- China: All the talks of a China hard landing or soft landing doesn't seem to matter to Apple as it's landing many more customers to its stores. Apple just recently opened its biggest Asian store in Beijing. The two most important points in this report are shown below.
As usual, the store opening was treated with enthusiasm and this is encouraging given China's powerful middle and upper classes. But this has become the norm for Apple. So, nothing surprising there.
But this point assumes more significance as it's about the dollars that Apple generates from China. The sales figures in the first half of fiscal 2012 almost matched the total returns in 2011. If that isn't impressive, we must wonder what is. One can expect similar, if not the same, monstrous growth in China for the next few years.
- Technical #1: During the last "Slingshot," Apple's RSI was still slightly above the oversold levels. This time the bears have managed even better as the RSI has fallen below the technical level of 30, which represents extremely oversold.
- Technical #2: As mentioned in some previous articles, a 10% correction is seen as healthy for stocks that have been on a huge run. Apple is down more than 13% from recent high of $705. This indicates that maybe the sling has already been pulled enough and is about to be released.
Conclusion: Apple is expected to earn $54 per share in 2013 as of now. Even if the estimates are slashed and Apple misses a few, a $50 EPS is almost certain to happen. Again, no one has a crystal ball but the odds are clearly in favor of Apple with all these new products, a great cash hoard, and China. As Zaky says, load up now to make an easy 50% on the way up. But be prepared for a tight tussle with the shorts and the naysayers.
Disclosure: I am long AAPL.