We all saw the initial earnings surprise.
We all saw the stock pop on the news.
So why the heck did Apple (AAPL) actually drop on Wednesday???
Here are 5 reasons why with plenty of ammo to help you slough it off and get prepared for greater highs with this stock.
1) People are Still Worried About Steve Jobs’ Health: Jobs is clearly the guy who put Apple on the map. And arguably one of the top CEOs of all time. But given the stock’s stellar performance from his previous medical leaves, there is no good reason to be spooked away this time around. In fact, I think that every investor in Apple has to own these shares with the unfortunate assumption that he may pass away in the near future. I still think the stock is worth $500 with or without him. So I see no logical reason to discount the stock given this news.
2) Pull of the Stock Market: When the overall stock market is down, it generally puts undue pressure on even the most fundamentally sound stocks. And it is especially hard for larger-capped stocks to pull away from the market average given how much of their trading activity comes from the buying and selling that index ETFs do on a stock like Apple. This is the weakest of the 5 points…but a factor nonetheless.
3) Third Time is NOT the Charm: The past two quarters Apple pummeled earnings estimates and yet still the stock had a lackluster initial response. I guess this makes 3 times in a row. The key is to remember the stock kept advancing in the weeks/months after those reports. This time should be no different.
4) Buy the Rumor, Sell the News: Some people just want to trade in and out of stocks during earnings season. Not too long ago these shares were at $320. Many traders loaded up there and were quite happy to take profits today with the price over $340. Most investors don’t operate like that. So don’t read more into the weak price action than that.
5) Why Shares Are EASILY Worth $500: I looked at more than a dozen fresh analyst research reports today. They were all fawning over this earnings surprise, which led to a stream of positive estimate increases and target price raises. It looks like the 2011 consensus will rise from $19.91 to around $23. Now we all know that Apple will not keep up this torrid growth pace forever. However, I still think that a PE of 20 is quite reasonable. That would make for a valuation of $460. But wait. They are now up to $64 in cash per share. So that puts fair value at $524. And let’s be honest with ourselves. Given the string of earnings beats to date, most likely this $23 estimate will prove light in the end.
When you add it all up, you start to realize that today’s decline is a silly apparition. The fundamentals clearly point to greater gains. And yes, I absolutely have my money in this one as well.
By Steve Reitmeister