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Jason Russell
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Hi, my name is Jason and I have been a private stock market investor, trader and writer for over 10 years now. Using a combination of fundamental analysis to find cheap stocks, combined with technical analysis to find the best entry/exit points and by watching where the smart money is going, I... More
  • Why Apple Needs To Be Part Of Your Portfolio! 0 comments
    Jan 2, 2013 8:37 AM | about stocks: AAPL

    Get a room full of so called "expert" stock advisors and the chances are you will walk out more confused than when you walked into the room. The probability is that half of them will be bullish and half will be bearish on the same stock, all citing what appears to be excellent and professional reasoning. Where does this leave you? After all they are experts, right?

    One stock we are hearing a lot of opposing opinion on in the headlines at the moment is Apple (NASDAQ:AAPL). Since the release of the much anticipated iPhone 5 in September, Apple's share price has tumbled over 20 per cent, from all time highs of $US705 to a six month low of $US501. If you have been considering Apple (like a lot of people have) after it's huge decline, you are not alone. I am going to tell you why Apple is an overwhelming BUY, why you should ignore the negative chatter and why the worlds largest company should be part of your portfolio.

    (click to enlarge)Apple 6 month chart

    Apple is on sale but maybe not for much longer! With Apple now hovering around the $530 level and the next big resistance level at $US539 we are seeing a lot of fund managers changing their neutral stances to Buy and Overweight ratings again, with most having 12 month targets on the stock of between $650 per share to $1000 per share. If these levels are reached in 12 months we are looking at some very good returns from a company that has billions of dollars of cash and also pays a dividend!

    At the moment Apple has some of the best financials going around. If we compare it's fundamentals to other tech companies, Apple is a clear winner. The average trailing P/E ratio of technology companies listed on Wall Street sits at an undesirable 22 times earnings, while Apple's P/E ratio sits at only 12 times earnings. To ad to this, it pays a very healthy 2 per cent dividend, has around $US120 billion in cash, enjoys remarkable year on year revenue and profit margin growth, and management is achieving a staggering 42 per cent annual return on shareholder funds. If we compare these figures to another tech monster like Google which has an average P/E ratio of around 20 times earnings, does not pay a dividend, and has slowing revenue and margin growth, we get to see how cheap Apple really is.

    Compared to other well known Nasdaq listed companies, Apple looks cheap, dirt cheap. The average trailing P/E ratio of the top 100 Nasdaq listed companies is around 24 times earnings. Few companies come close to matching Apple's financial credentials, yet at the moment investors are more willing to pay far more for sub average technology companies such as Amazon. With its share price driven primarily by huge future sales/earnings expectations, it sits on a ludicrous 427 trailing P/E ratio. Despite missing earnings and a ludicrous valuation, Amazon is down only -2.82 per cent amid broader market weakness, whereas Apple has plunged -20.00 per cent! Do the math.

    There is a lot of speculation as to why one of the largest companies on the planet has fallen so much in the space of only a few months and we keep hearing reasons such as increased competition, constant legal disputes, lack of new innovative products and worries about iphone 5 sales, but the real reason behind Apples fall is not spoken about. It is called "portfolio re-balancing" and is the single biggest driver behind Apples fall. Luckily for us it has not only put Apple stock on sale but it has positioned the stock for quick returns back to the $700 level and beyond. I will explain why in a moment.

    Firstly let me explain how asset managers and their so called portfolio re-balancing has driven down Apple shares. Lets assume for a second that you are a hedge fund manager. Lets also assume your maximum allowed holding on any one stock in your portfolio is 10%. One year ago almost all asset managers were bullish on apple and it makes up a large portion of the Nasdaq so lets assume you filled the maximum 10% of your portfolio with this one stock. Now the year to date return on apple shares was in the order of 75% in Sept 2012 which means that your 10% Apple allocation was now worth about 17.5% of your total portfolio. With the fiscal year finishing in Oct and to keep their portfolios risk levels in compliance, fund managers had to do some "re-balancing" which meant reducing the amount of Apple shares they owned. This of course explains the nonsense selling of apple shares.

    Institutions that sold Apple to get back down to their asset risk limits will now be underweight again because of the drastic fall in Apples share price. Guess what that means? Yep, they will be topping up!

    So will 2013 be the year for Apple and it's shareholders? With rumors of testing for the new iphone 6, possible launch of rumored Apple TV(which could be a game changer), 120 billion dollars in cash, excellent management strategy and experience, awesome fundamentals and prices at 10 month lows.

    I believe it will.

    Disclosure: I am long AAPL.

    Stocks: AAPL
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