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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


November 8th 2012 Apple
Nasdaq Symbol: AAPL
Industry: Technology
Price as of 11/8: $537.75

Our bull market has hit a few bumps in the road over the last several weeks. Less than stellar third quarter earnings and a disappointing election, at least in Wall Street's eyes, has produced a number of sellers. Add the pending fiscal cliff at year end and it's easy to see why the S&P 500 has dropped 6% in the last several weeks following a 16% rally through mid-October. Half of the correction has come in the last two days. Financials which have held up well have come under pressure due in part to concerns the current administration will continue their burdensome regulations. A number of commodity and defense sectors have come under pressure for similar reasons, but really nothing has been spared. The tech sector started the weakness last month with PC and PC related stocks coming under pressure. Most of the weakness has been due to consumers switching to tablets and smart phones made by Apple. But even Apple hasn't been immune to the selling pressure which has given us the opportunity to feature it once again. The last time we featured Apple, nearly 3 years ago the stock traded for $192 a share. Since then the stock has more than tripled and earnings have risen fivefold. Not bad. But even with the success of Apple, the stock remains cheap and compelling thanks in part to the recent pullback. Apple is not a conservative stock even with the low valuation, but with the recent 23% correction Apple provides a short term trade and long term capital appreciation for investors that can withstand some volatility.

As far as culprits for Apple's pullback, there are a number of candidates, some more legitimate than others. But most of the problems are short term in nature, namely supply constraints for the iPhone 5. Apple's own website warns buyers of 3 to 4 week delays in shipments, but that won't last forever. Management shakeup in the software space has concerned some while Apple isn't disclosing iPad mini sales estimates even though they should be great. These short term concerns still won't stop Apple from producing an all-time record quarter. Current lowball guidance is targeting $52 billion in sales, topping last December's record $46.3 billion. On top of that, this year's product lineup heading into the all-important holiday shopping season is much stronger than it was last year. The iPhone 5 is a bigger upgrade than the iPhone 4S. The new iPad Mini is going to fill many stockings (it fits perfectly!), and the iPad 4 also received a spec bump. The iMac has just gotten a dramatic redesign, and MacBook Pros now sport Retina displays. That includes the 13-inch version, which is Apple's top-selling notebook model. Combined, these new and old products will generate 80% of the holiday sales producing an almost certain record quarter.

The valuation for Apple is quite compelling verse competitors from today and yester years. Unlike the 30, 40, and 50 times earnings estimates for Microsoft and Cisco a decade ago, Apple's blistering sales and earnings have kept pace with the valuation. Currently, the stock trades for 10.7 times earnings, 9.7 times next year's earnings, 3 times sales, and 4 times book value of $125 a share. The company is producing $50 billion in profits a year and $31 billion in cash flow a year. Pretty amazing. Thanks to the cash flow, the company has started a dividend, but won't go ex-dividend anytime soon. Apple's stock could keep falling, but the recent pulling back is enticing for aggressive investors looking for a spectacular holiday season.