Tags: Arends | Apple | good | investment

WSJ’s Arends: Don’t Fret Apple’s Decline, Stock Still a Buy

Monday, 24 Dec 2012 09:16 AM

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Apple is still a good investment despite the many warning flags that say otherwise, says Wall Street Journal columnist Brett Arends.

Apple stock is down 25 percent in three months, having lost $170 billion in market value — roughly three times the value of Boeing, MarketWatch reports.

In addition, of the 57 analysts who cover Apple, 48 rate it a “buy” and just three have slapped a “sell” recommendation, according to Thomson Reuters data.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

Too many buy ratings keep a stock popular and prevent it from declining to bargain levels that make it attractive to bottom fishers.

Moreover, Apple carries a massive market cap of $491 billion, making it difficult to offer attractive returns, especially when the company’s widely popular tablets are facing stiff competition.

But don’t panic, according to Arends.

“The company’s market value is gigantic, but so are the profits. The current stock price is still only about 10 times forecast earnings for the next 12 months — a very low valuation for a quality company,” Arends writes in a column appearing on MarketWatch.com.

“The stock market average has historically been about 14 to 15 times forecast earnings.”

Further, cash flow per share will rise as well.

Meanwhile, other companies producing their own tablets was an inevitable trend.

After all, Apple didn’t invent the tablet — Microsoft unveiled one in 2000, but quality products and a loyal following in the developed world as well as in emerging markets go a long way for Apple.

“Apple still has a reputation for design, excellence and ease of use that is well-founded and hard to dislodge. It can lose that reputation, and losing a reputation is easier than gaining one, but as long as it can hold on to that, it can continue to charge a premium for its products,” Arends states.

“This should be viewed as a luxury-goods company as much as a technology company. Millions of people choose to pay more to own an Apple.”

Lastly, more products will gain ground such as the Apple television set, plus don’t forget demand for the wildly popular iPhone will remain strong.

“All this is good news. And before investors panic, they should understand why the stock has fallen. The introduction of the cheaper iPad Mini, and growing competition in the tablet business, has caused a flurry of uncertainty. Fund managers hate uncertainty. They run from it, irrationally,” Arends says.

Fears the United States may careen over a fiscal cliff — a combination of tax hikes and deep spending cuts due to take effect at the end of the year, have pushed down Apple stock along with most others in general, especially on fears that taxes on investment income may rise.

“I’m skeptical of any stock everyone loves, and I am not surprised at the recent reversal hitting Apple. I’m actually surprised it has taken so long. And it’s needlessly risky to have more than about 10 percent of your portfolio in any one stock,” Arends writes.

“Is the current panic overdone? It wouldn’t be the first time.”

Meanwhile, big retailers like Best Buy, Walmart, Radio Shack and Target have cut the price of Apple’s iPhone 5 by $50 or more in some cases, stoking concerns among some analysts.

“Global consumer demand for iPhone 5 is not as strong as we anticipated,” Pacific Crest’s Andy Hargreaves writes in a note to clients, according to Wired.

“Although we believe iPhone 5 remains the best-selling, high-end smartphone on the market and is likely gaining significant share right now, a combination of market saturation, weak global demand and incremental innovation that has surpassed consumer demand are likely negatively impacting iPhone sell-through.”

Translation, the iPhone 5 is not selling as hot as markets had hoped, Wired added.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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