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Apple: When To Buy It - If You Should

|About: Apple Inc. (AAPL), Includes: AAPL, T, VZ

Fundamentally, Apple (NASDAQ:AAPL) is a screaming buy. The problem is: fundamentally it also appeared to be a screaming buy in September, 2012 just before it began its freefall from $705 to $450 - a loss of 36%.

Before The Fall

In September, 2012 its PE was just above 16 - not expensive compared to the S&P average in the same range. It's PEG ratio was under 1 - generally a sign of value. It sported a huge cash hoard on its balance sheet around $130 billion. It was adding to that cash hoard in the neighborhood of $3 billion per month. It had just released the iPhone 5, adding to its stable and highly regarded lineup of products (iPhone, iPod, iPad, iTunes, apps, computers, retail stores, etc) and continued to attract positive attention with rumors of an iTV in development. A number of analysts had price targets of $1000 and higher.

After The Fall

Today, all of the fundamentals in place when the stock lost 36% in its fall over the past six months are still in place - only the PE and PEG are even better than they were. Further, the stock currently yields 2.3% and that yield may soon increase significantly as the company appears set to announce next month what they will do with a portion of its cash.

A healthy dividend increase or a special dividend are likely possibilities to return value to shareholders. And then there are the rumors of development of an iTV and/or an iWatch. Apple has a justifiable reputation for cutting edge innovation and revolutionary products. Steve Jobs, considered the visionary for these products is of course gone, but the products in development when he passed are still there being worked on by the same teams as before. An iTV would be a blockbuster and could revolutionize how we receive and use TV content the same way the iPhone changed telephone.

Apple does, however, have its challenges. It's facing increased competition - primarily from Samsung, which has been producing mobile phones that not only rival the iPhone but are being viewed as superior in many respects. Market sentiment has turned negative and for the first time negative press has dominated.

Criticism of Apple used to be rare. Now we see articles comparing the iPhone 5 unfavorably to the Samsung Galaxy S 4, activist whale investors are becoming vocal about the company's failure to return cash to shareholders, and recent criticism from China about its warranty policies continue the negative theme. And, the simple fact of Apple's price decline contributes to the negative feeling and the inevitable question of whether the decline will continue.

Another interesting development is the new T-Mobile pricing model proposing no contract mobile phone plans without the subsidy previously paid by phone carriers ATT (NYSE:T) and Verizon (NYSE:VZ). With these new plans, the customer would have to pay full price for the phone (over time) but gets a good data plan and there is no 2 year contract. Speculation is that if this pricing model works it may negatively impact what Apple can charge for a phone as customers are used to thinking the phone costs $300 rather than $600 due to the subsidy they have been getting. And if ATT and Verizon copy the T-Mobile pricing model the vanishing subsidy would put downward pressure on Apple revenue.

To Buy or Not to Buy.

While Apple appears to have put in a floor in the $425 range and has now moved up some, it has mostly gone sideways since hitting its recent low of $420 on March 4. It seems to be putting in a base as most of the sellers have likely been shaken out by now.

My Take: If you have a long term time horizon Apple provides a favorable risk/reward at its present level. Build a position by scaling in over time. The market seems due for either a normal correction - or maybe something worse. In either event, starting a position now and scaling in when the market takes everything down with it in one of its yearly (or more frequent) downdrafts, is likely to be rewarding in the long run.

Disclosure: I am long VZ, T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.