Is Apple Still a Buy? Yes. And No.

Posted: Mar 16, 2012 12:01 AM

At $585.56 per share, is Apple Inc. still a buy?

Under many scenarios, yes.  Under my criteria, no.  Am I going to buy it anyway?  Yes.  Let me explain.

Apple is a great, growing company with no long-term debt and TONS of cash -- more cash than most countries have in their annual budgets.

Wall Street consensus earnings estimates show 2012 earnings per share (EPS) coming in at $42.97.  That means that the price earnings ratio is 13.6.  And Apple's projected earnings growth rate this year is 55%.

Re-cap:  55% 2012 EPS growth and a PE of 13.6.  From a fundamental point of view, this screams undervalued stock.

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Apple Stock Chart

Apple Stock Chart by YCharts

The chart:  Apple stock has made a 38% price move since it broke out in January.  It's over-extended, and a price correction is inevitable.  Stocks which have had big price moves can have big price corrections when an overall stock market correction comes upon us.  Most stocks fall a decent amount at that time, and bargain hunters go shopping.

The best stocks to buy after a stock market correction are (1) stocks* which only fell a tiny percent compared to the market as a whole, and (2) stocks* which are correcting from a big run-up. (* And always, these stocks must have excellent fundamentals.)   The former are stocks with really strong charts and the latter are glamour stocks which tons of people want to buy when they go on sale.

I'm in the category of people who want to buy Apple after the next stock market drop.  But for me, it's a little more sentimental than fundamental, because here's my problem:  Apple's EPS growth in 2013 and 2014 is only projected to be 11% per year.  And I don't recommend stocks unless they have a combined projected EPS growth rate plus dividend yield equalling 15% per year.

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If you currently own Apple -- or most any other stock, for that matter -- use stop-loss orders to protect the downside.  Because these stocks will eventually fall with normal stock market corrections.  When the correction bottoms, you can buy more shares of the same stock AND lock in a higher dividend yield, you can buy other stocks with better charts, or you can buy Apple.  Right now, for example, I have a stop-loss on Lorillard (LO, $130.40) at $127 and a stop-loss on Visa (V, $117.00) at  $113.  If you've never used stop loss orders before, you'll get emotional when the stock sells, you'll likely second guess yourself and rue the day.  But the FACT is that you probably did something wise, you have a stock shopping list, and you can place that money into another stock the very same day which has a better chart or better earnings growth.

I'm at the point where I don't revisit the prices on stocks which I get stopped out of, and I gleefully invest all the cash when the market bottoms again.

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Good luck with Apple, and with your other stocks.  Stay diversified, protect your downside, and constantly re-visit your investing "rules" with an eye toward refining them over time.  If you're using the same rules you were using in 1992, your performance is not improving.  There's more to portfolio growth than earnings and charts -- your investment strategy is vital to your success.

For Townhall readers we’ve published our 2012 model portfolio for Trading and Aggressive Growth. For our subscribers, we’ve created model portfolios for Growth and for Growth and Income.

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