Apple stock dropped 44% in seven months, from its peak of around $700 in September 2012 to $390 in April 2013. The drop was due to slowing growth, a dearth of exciting new products, increasing competition, compressing margins, and negative year-over-year earnings comparisons. Analysts demanded a more shareholder-friendly use of the company's huge cash balance. As a result, on April 23 when AAPL reported its 2Q13 earnings of $10.09 per share (down 18% Y/Y), the company announced that $100 billion would be returned to shareholders by the end of 2015, through $60 billion in share repurchases and a 15% increase in the dividend to $3.05 per share.
Over the past few days, AAPL's stock has rallied about 6%, to its current level around $432. So, is the worst over? Is it safe to buy into the Apple story?
Depends on your investment perspective. If you are a value investor buying the stock primarily for its dividend, then your downside is probably limited. The 3% dividend yield will help provide a floor for the stock. On a technical basis, there is strong support around $400, where the stock churned for about six months from July 2011 to January 2013. So if you are willing to buy and hold, it's probably worth taking a small position.
However, there are large numbers of growth investors who were not nimble enough to dump the stock when it started its downspin. These folks will be looking to sell this broken growth stock into any strength, which means it is unlikely that AAPL will have a smooth ride up. Price points of $460 (up 6%), $480 (up 11%), and $550 (up 27%) look especially vulnerable. So, as a value investor, start building a position in AAPL at current levels, while looking to add on pullbacks as growth investors continue to exit.
Growth investors should stay away from this one. Lower margins, increased competition and delayed new product introductions are not what you want to see in a growth stock. And earnings uncertainty remains high. Consensus estimates for FY 2013, 2014, and 2015 are $37.48, $37.68, and $37.44, respectively, which indicate stalled growth. More significant is the range of estimates. The high estimate for 2013 is 36% above the low. For 2014, the high estimate is 64% above the low. And for 2015, the high estimate is a stunning 91% above the low. This means that analysts have very low visibility in predicting AAPL's earnings. It seems unlikely that the future will have the same growth trend as the past, absent some exciting and as yet unidentified new product.
The challenge for AAPL stock is that the investor base is changing. Growth investors are still fleeing, while value investors are reluctant to step in until there is more clarity. A huge changeover like this in the investor base does not happen smoothly. It takes time and a lot of "back and fill" on the price action until a new trend is firmly established. Value investors should watch for pullbacks to build positions.
Disclosure: I am long AAPL.