Apple, the darling of the tech world for several years, achieved near-deity status earlier this year and like Phaeton, who could not control his father’s sun-chariot across the sky and fell to his death, Apple has taken a fall in the last few weeks, coming back down to mere mortal status.
The selling has likely been accelerated by hedge funds and mutual funds trying to lock in 2012 capital gains before the scheduled rate increase in January.
Should you buy Apple? – not while it is falling. But it is at a low price on most metrics and the fundamentals are still terrific. We just need to see a better chart.
Apple now sells at 10 times profits, a huge discount to the overall market, and yields 2%. The main knock has been that its huge market shares in iTunes, smart phones and tablets are being eroded by the purchase of phones based on Google’s Android system and by Amazon and others chipping away at the tablet market. But, Apple’s sales in these areas are not likely to fall, merely slow down in their growth rate.
How fast does a stock selling for 10x profits have to grow in order to justify the price? A rule of thumb that has worked well for me over the years is a growth rate in sales that exceeds the P/E. Using, that approach, I would be shocked to see Apple grow sales at less than 10%, especially when you consider how little of their sales come from overseas. They only introduced iTunes in Mexico a year ago, for Pete’s sake.
I would buy AAPL when their falling stock price flattens out. That could easily happen in the next month.
Amazon, Google and to a lesser extent eBay have also seen declines, though smaller than Apple. EBay has only declined in line with the market. These stocks have been stellar performners this year and I would keep my eye on them to either pick up more shares or buy first-time positions. Add QCOM to that watch list. It is already acting better.
Since the market trend is down right now and may continue that way as year-end selling continues and the fight for an agreement on the fiscal cliff rages on, there is no hurry. But you ought to start looking at these companies if you don’t already own them. I will add, though that should the market continue to decline, these higher volatility stocks would lilkely fall more than the market in general.