The following are a few thoughts on Apple that have been excerpted from the Inter-Issue Commentary that was published for subscribers over the weekend… enjoy!
Though I hope you are mainly focused on the fact that the market appears to be breaking out to the upside after all, I know many of you are probably more concerned about the action we have seen lately in Apple’s stock following the company’s “disappointing” earnings report earlier this week.
And, while it has admittedly been painful to watch the stock tumble so sharply, I believe it is important to keep in mind that it is actually following “the script” quite nicely in terms how stocks that become over-owned act once the pendulum starts to swing in the opposite direction (as it is obviously doing now).
As mentioned earlier this month in the January issue, history suggested that if the stock “broke $500 on the downside for more than a day or two, it would likely trade down to the $425 range in a hurry”… and even though it closed on Friday closer to $440, I continue to believe that the odds still favor a close below $425 before all is said and done (and, not to alarm you, but the charts do suggest the bottom may not actually be put in until the stock has spent a fair amount of time trading between $375 and $400).
The good news, of course, is that once the madness of crowds has passed and all of the weak sellers have finally gotten rid of their shares, the pendulum will once again start to swing the other direction… and given the company’s strong cash position, loyal customer base, and very solid product line-up (despite what many of the “Nervous Nellies” are saying these days), all it will take is a quarter or two of the company beating greatly lowered estimates for the stock to trade back up the $550 range for us.
Of course, if Apple ever gets around to turning its “hobby-level” interest in TV into something resembling a full-blown commercial effort, there is also a pretty good chance that the herd will reverse course sooner than anticipated… and thus you are strongly encouraged to make sure you own at least a small position at current prices if you don’t own one already.
To be sure, many of Apple’s competitors are finding success in the markets Apple pioneered over the past ten years, but please keep in mind that these markets are huge when looked at on a worldwide basis, and there is still plenty of room for all of them to find success in the years ahead.
I realize that with so many people warning that Blackberry and Android are going to take over the world, it can be difficult to stay focused on the big picture. However, if you find yourself feeling anxious about sticking with our long-term game plan, I hope you’ll take a moment to remember that it is going to be far easier for Apple to sacrifice a bit of amazingly high profit margin while muscling in to the lower-end device market than it will be for the companies currently dominating at the low-end to somehow start producing a higher-end product that will most likely result in negative margins for them given how their business models are set up.
To be sure, a lot can happen in a short period of time when it comes to fast-paced world of technology… however, at least for now, I hope you will avoid the temptation to confuse the violent move in the stock (which, again, is quite typical for a stock that had become as over-loved as Apple was at the peak several months ago) with a radical change in fundamentals for the company (as many of the naysayers would like you to believe is happening). Again, I will be watching the situation closely and will be certain to revise my outlook if it appears something is going horribly wrong… but for now, please feel confident owning at least a small position going forward, and ideally, we are approaching levels that I think you can also start being a bit more aggressive about making additional purchases as well.