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AAPL: Trading The Spoiled Fruit

|Includes:Apple Inc. (AAPL)

The investment community is up in arms about the spoiled fruit ever since its meteoric rise last year into the $700 region. Today, the investment community has turned its back on AAPL complaining about the size of the company and competitive factors. It has really become a fight of technical analysts versus fundamental analysts, but it will take a combination of these two methods to correctly assess where the stock is and will go. I believe that Apple is a phenomenal investment within the next few quarters, and will add billions to its coffers over the next three years.

There are three factors that have given Apple worms

  • Management
  • Missed Earnings
  • Dividend Perception

One of the big reasons we hear all over the investing talk shows is the leadership change. They are afraid that Tim Cook is not capable of running the company. Of course his predecessor (Steve Jobs) was an icon and did a remarkable job, and the company only experienced rapid growth. It makes sense that Tim Cook and the company would be scrutinized every step they take. Also, it doesn't help when major mistakes have been made under his leadership. Making the Ipad mini the next "revolutionary product", allowing innovation to take a back seat, and problems with the iPhone 5 rollout, and issuing a dividend all fall short of what investors have learned to expect from Apple.

Tim Cook has to do a better job. When Steve Jobs was at the helm the company commanded a P/E multiple above 18. Investors are unwilling to pay for a leader who is less qualified and have slapped Apple with a current P/E of 9.5. Tim is not the best leader on the planet, but until he creates a real revolutionary product or at least shows that he can beat estimates like his predecessor could then I fear we have spoiled fruit on our hands.

Another critical point that investors look at is does the company beat analysts expectations. Here is a chart showing the 2012 missteps, and as you can see the second and third quarters were all investors needed to give Tim Cook the vote of no confidence, and to begin taking their investment money away from the company.

To highlight the sentiment in analysts, look at how they have changed their earnings estimates for the company.

For a new CEO, all it took was an earnings disappointment for big money sellers to step in and crater the behemoth.

Another reason why Apple's stock has been dismal for the past two quarters is the dividend that they began. About half a year after Apple announced a dividend, it's stock began to tank. I think most investors were waiting for the announcement to begin liquidating. When a company begins paying a dividend it is usually a sign that the high growth period is over, and a period of stable growth has begun. To investors the company is saying that it is more profitable to shareholders to have a dividend. Today, Apple's book value sets at $135.62 per share, which right now places the stock at 3.12 times book value. This is a large discount to other high flyers, such as Priceline at 8.89 price/book and Netflix at 12.44 price/book both of which do not pay a dividend. However, looking at Microsoft who does pay a dividend trades at 3.3 times book. Microsoft has been a long time rival, and I believe that investors are looking at them for a comparable evaluation.

Microsoft pays a 3.2% dividend while trading at a 3.3 price/book ratio. Apple's dividend is a mere 2.4% while it trades at a 3.12 price/book ratio. Apple needs a few quarters to grow into its stock price, and the new dividend era that it has entered into. With this said, I think that at 2.5 times book AAPL would be a steal, and would look to mid second quarter to early third quarter for the big buying to begin. I do not believe that AAPL will make it to 2.5 time book as price would be $339, and I think once Apple breaks 3 times book that investors will begin getting into the stock.

Looking at the technicals AAPL is getting close to a bottom, and we want to be ready when it happens. Since the high last year AAPL has been in a congestive state, which in Elliott Wave terms is a wave 4. Wave 4s are notoriously choppy and difficult to trade, but when they are over a renewed strength can be found usually taking it to a new high, and in this case probably getting close to $1000. Right now, I am thinking the stock could come back up and touch the trendline once more before falling into the congestion area I have as support.

I will be watching 410-360 for possible support for an end to the larger wave 4 and smaller timeframe wave v, and then lookout because AAPL should be headed for new highs. Another thing to take note of is as AAPL falls it's dividend gets more attractive. At $360, 2.65 times book, per share you will be getting almost 3% to hold apple stock.

Apple does not deserve to be valued like Microsoft, and this gives investors a huge opportunity. Tim Cook has been with the company for over 15 years, and is not a rookie. He will find his own voice sooner rather than later I predict. Apple has a ton of money in the vault, and is making a ton of it. Just look at how far earnings per share has come.

Apple is not losing money, they just missed a few analyst expectations. A company growing from $0.10 in 2003 to $44.64 in 2012 deserves to rest on it's laurels for a few quarters I think. Microsoft currently enjoys a P/E multiple of 15, and I believe Apple will see this same multiple in the next year. At the conservative $49.64 per share estimate for 2014 earnings a P/E of 15 would give the stock a value of $744.60. I will wait for price to get under $400 to look to initiate a position, but the conclusion remains simple: buy apple.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in AAPL over the next 72 hours.

Stocks: AAPL