Hold on to Your Hats

Stock (Symbol) Stock Price

Apple (AAPL)


Data is as of Expected to Report Sector

July 28, 2010

Oct 20


Sharek’s Take
David SharekApple has two catalysts right now — the iPad and the new iPhone — and either one would make AAPL the best stock to own right now. Both make AAPL one of the best stocks to own ever. The new iPhone has an antenna glitch. To remedy the situation, management had the choice of:

  • recalling the phone (at a cost of $900m-$1.5b, CNBC)
  • making an in-store fix ($300m)
  • issuing a free case ($45m)

Apple chose to issue a free case, which costs the least amount of money. I think this is a tiny issue anyway, that will be fixed soon. Also, Apple opened its second flagship store in China this month and should have 25 stores in the country by the end of 2011.

One-Year Chart
Why isn’t AAPL going higher now? It went on a tear from $125 to $275 in a year — without a correction. Market corrections (like we just had) are perfect times for hot stocks to take a breather. Apple is taking a breather.
Apple’s P/E has fallen from 20 to 16 since last quarter. 16 P/E gives the stock huge upside with the solid profit growth that’s no doubt lies ahead. AAPL could be worth 25-35 times earnings right now. This stock seems to be one of the easiest ways to make a substantial amount of money in a market that has been going sideways all year. 
Earnings Table  
Apple was sensational once again last quarter. Sales rose 61% last quarter, accelerating from the 49% a quarter earlier and 32% the quarter before. Revenue was $16 billion — a billion over forecasts. Profits surged 160% last quarter and 150% the quarter before that. This company is on fire.
AAPL whipped estimates by 70 cents and is pounding estimates every quarter.
Annual Profit Estimates continue jump. 2011 estimates have done the following during the last four quarters: From $9.37, to $13.08, then $15.08, and now $16.46. So we thought AAPL would make less’s than $10 and now that figure is more than $16? Will it really come out with $20? If it does, even a P/E of 20 takes the stock to $400. 
Profit growth looks to slow from the triple-digit rate to 13% during the next four quarters– but estimates are increasing. Apple always underpromises and overdelivers.
Fair Value
Apple is worth 35 times earnings. I think the stock market needs to rise for Apple to go on a run. Apple’s fiscal year end is September 30th, I like to stay a quarter ahead of the herd, so I’ll use forward-looking estimates to generate a fair value.With such positive upside, its easy to low-ball a price target on Apple. I mean, a $600 stock seems too high. But if the stock were $450 now that $600 wouldn’t seem too high. The market needs to take this stock higher — and this is precisely the situation that could lead to a double.
Ten-Year Chart
Apple has been an awesome stock during the past decade, but the stock’s growth hasn’t kept up with profit growth. That tells me the P/E has to enlarge until those two figures meet. Once again, Apple’s P/E is too low and many factors point to this. The combination of profit growth and an increasing P/E give AAPL huge upside. Do note however the stock is prone to corrections.
Power Ranking Bottom Line
Growth Portfolio

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Apple is one of the most undervalued growth stocks I’ve ever seen. Its not even like we can assume something can go wrong — this is a large stable company that’s selling more and more products every day. Apple has tons of cash, superior catalysts, is upping estimates and beating the street — this is the perfect stock.
AAPL clearly the best stock to own in the the 16 stock Growth Portfolio and the 10 stock Aggressive Growth Portfolio Power Rankings. This is one of the top stocks of our generation and all signals point to an explosive move ahead. Apple is my largest holding and even if we go through a flat market, I feel this stock can lead our portfolios to impressive gains. Hold onto your hats.
Aggressive Growth Portfolio

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David Sharek David Sharek is stock portfolio manager and CEO of DavidSharek.com. David believes a company's profits ultimately drive the price of its stock. His book The School of Hard Stocks can be found on Amazon.com.