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One Bad Apple

aapl-feb-retrace

One of the big stories this week is the move lower by Apple. There is a lot of speculation that their sales of Mac computers have slowed significantly along with PC sales. This speculation is coming from two primary sources – Cirrus Logic, who provides components to Apple, reported slow sales this week and an online tech news source reports that Apple has stopped ordering components leading to the belief that they severely overestimated potential Mac demand (source: Doug Kass’ blog).

TECHNICALS
If you look at the chart above which shows Apple from the March 2009 low to today, you can see that it has retraced almost 50% of its move. From a technical standpoint, that is generally considered a good buy point. The 50% retracement level is considered a fairly strong support level and can generally be bought – if the fundamentals are still intact.

However, if Apple earnings are significantly impacted by the issues above, then we may be in for more downside and the $385 we see at the 50% retracement level might simply not hold.

If, on the other hand Apple earnings are not as bad as people speculate, then we could easily see a bounce back to the $458 level that was previous support.

VALUATION
Right now, its trading at a P/E of 9.7, well below the market P/E of 14.3, Microsoft’s P/E of 15.8, and IBM’s of 14.4. It has dropped to a new 5-year P/E low, falling out of its previous range of 14.6 to 20.1.

It is trading at a 6.1 Enterprise Value to EBITDA ratio (very close to the key “5” level I’ve written about here on the blog previously).

If Peter Lynch were looking at this company, he would be thrilled to see that it is trading at a P/E to Growth (PEG) ratio of 0.52 and has no debt.

EARNINGS
Unfortunately, until Apple reports, all we have is speculation that earnings estimates are overly optimistic. Right now, this stock is trading on speculation (albeit speculation based upon some solid reporting) and will continue to move with any further news until they report actual results and forecast the year.

CASH ON HAND

One of the big speculations that is going on outside of earnings is on what Apple will do with their cash. Many value investors are betting they announce a dividend increase so that stock yields in excess of 3.5%, potentially even 4%. They are also speculating that there might be a stock buy back that will increase the earnings per share and help drive the stock price back up.

Again, this is all speculation until we hear from the company. However, if we get a 4% dividend from Apple, you will see people jumping into this stock with abandon as value managers and dividend income investors grab up shares to augment their portfolios.

THE WAITING GAME
So, at this point, we are all just waiting to see what they have to say. We will probably pick up some shares if it falls to the $385 level because odds are we will get some sort of dividend increase, and since we are already at a 2.5% yield it wouldn’t take a big increase to get us above 3% and that will begin to draw some people into the stock.


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Mark