Let's Get Real on Apple

 | Dec 11, 2012 | 11:00 AM EST  | Comments
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On Monday, I saw Doug Kass on CNBC's Fast Money. Doug was so negative on Apple (AAPL), I thought I was watching an episode of Doomsday Preppers. Doug talked so fast, I thought he was going to pass out from lack of oxygen. In the end, Doug said that Apple was only a trade and no longer an investment. 

And it's just not Doug. The negativity surrounding Apple is amazing. When the stock was near $700, I never heard a peep out of the Apple bears. Now that the stock is down 25%, all of a sudden Apple is the next Pets.com. Lighten up, guys. It's just not that bad. 

First, I think it's clear that taxes are going up next year. Investors who have large capital gains are taking a little off the table to avoid the higher tax rate. Second, the stock has been hit by a wave of hedge-fund selling. In the first half of the year, Apple was the most widely held name by hedge funds. (In fact, 146 hedge funds owned the stock.) Once the decline started catching fire, the hedge funds moved fast to dump the stock. For example, Lone Pine Capital's Stephen Mandel cut his Apple holdings by 43%. These hedge fundguys just don't ride a stock down 25%. They act quickly to stop the bleeding.

Third, as the stock fell through support after support, the technicians jumped on board and declared that Apple would go lower. That was a self-fulfilling prophecy.

Fourth, the analyst community pounced on the company. Analysts are worried that Steve Jobs is still dead and that the company will never be able to innovate again. All the products going forward are simply incremental improvements over existing products, they say, and the company's drive for innovation has run out of gas. Poppycock! Steve Jobs wasn't the only person who worked at Apple. The company has a deep bench, and lots of innovative products will come out over the next few years.

While there may be truth in all of the concerns raised by Doug and others, I don't believe things are all that bad for Apple. As tax selling dries up at the end of the month, investors will be left with a much less expensive stock that is growing revenue at 15% annually. While that's down from the 23% posted last year, it's still a respectable growth rate for a company that achieves $192 billion in revenue. How bad could things be? For fiscal 2013, Apple has an estimated 40% gross margin and a $72 billion operating profit.

I keep hearing how cheap Apple shares are, but tech investors are momentum investors. They don't care about valuation. Doesn't matter. Top-line growth of 15% is irresistible to these guys. They will be back. Apple shares will go higher as the negativity ebbs, the tax selling slows and the greed comes back.

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