Monday, March 8, 2010

AAPL Is A Hedge Fund Battleground Stock....

For hedge funds, AAPL is the battleground of a broad market war. If they can move Apple up, the rest of the market will follow. If they can move Apple down, the rest of the market will follow.

Since October, this Apple slingshot action has happened six times; it's time to document a seventh. On Feb. 25, Apple was at $196. and it jumped $23 in the next six trading days. The slingshots move in approximately $20 increments.

So what should we do now? Will AAPL drop $20 like it normally does, or is this finally the run that takes Apple up to higher levels? One of these times Apple will break the trend and won't selloff. The strong fundamentals of this stock are based on its increasing rate of earnings per share that is being generated from market-share gains of the iMac and iPhone; as well as the introduction of the iPad.

Earnings growth is reason enough for the stock to go up. What makes the Apple story especially intriguing is the valuation. Casual investors tend to think that the current price is high. Nothing could be further from the truth.

From a valuation standpoint, this stock hasn't been lower since Steve Jobs returned to the company more than 10 years ago. The recession punished Apple by taking away its P/E multiple. If the market decides to return the Apple multiple back to its norms, it will cause Apple stock to receive a double whammy of improved earnings and an increasing multiple at the same time.

Earnings per share of $14 in 2010, in addition to a P/E multiple of 25, brings us to a stock price of $350. Apple at $350 wouldn't even be expensive. My definition of expensive would be a P/E multiple of 40 - based on AAPL's expected growth rate. Consider that AMZN has a current P/E multiple of 63, with a lower growth rate than AAPL.  Apple with a P/E multiple of 40 would equal a $560 stock price and if they got the Amazon 63 it would put Apple at $882. Will Apple get their cake (earnings expansion) and eat it too (multiple expansion)? We shall see. This is setting up to be the trade of the year.....

long AAPL

No comments: