For Apple, Value Will Win Out

 | Aug 19, 2014 | 4:00 PM EDT  | Comments
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Over the last couple of years, Apple (AAPL) stock has confounded many people who track value by conventional metrics. The consumer electronics giant has traded at discounted multiples of forward earnings ever since the stock collapsed in 2012.

Even after a good week or so, AAPL's forward P/E at close of business yesterday was around 14.5, compared to an average of over 16 for the S&P 500. If the analysts' estimates of forward earnings on which that number is based were inflated, then maybe that would make sense, but the evidence shows that they are not.

That is not to say that they never were. As AAPL approached $100 (adjusted for the split) for the first time I went against conventional wisdom and suggested that it might be overvalued. Part of my argument then was that analysts, after years of being made to look foolish by massive beats, had started to compete for the most optimistic earnings and price forecasts for the company. At that point, forward P/E was meaningless. Now, however, sentiment has changed, and the situation has reversed.

Presumably on a "once bitten, twice shy" basis after a disappointing year, the average growth forecast for one of the most successful companies of modern times is now averaging a modest 12.25% per annum over the next five years. I know that there is more competition out there than when growth was running at close to 100% in 2011, but with improvements anticipated on what many already regard as the best smartphone on the market (as well as the possibility of new products), does anybody really believe that Apple will miss its 12.25% growth targets? I know I don't.

The skeptics maintain that we've seen it all before: Apple usually roars up in the run-up to product releases, only to come crashing down shortly afterwards. It's a classic "buy the rumor, sell the fact" scenario. This time, however, because of the basic valuation, I believe it will be different. Valuation, you see, always catches up, whether that is when a stock is overvalued, as with AAPL in the past, or undervalued, as it is now.

Source: VectorVest

The price action also suggests that Apple is clear for a serious run-up. A few weeks ago, we saw a somewhat inevitable retracement after the psychological $100 level was reached. That level had even more impact as it signaled proximity to the all-time high of $100.72 – again, on an adjusted basis. The retracement was probably exaggerated by two factors. First, those who had looked at losses for two years were selling in fear of missing their opportunity once the pullback began. Second, it was the product of overall market weakness.

Now that both of those things are out of the way, I expect the stock to make a straight run to new highs. When that comes, AAPL will simply be doing what all stocks do: reverting to the mean in valuation terms.

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