Why Calls to Sell Apple Are Premature, but Not Unfounded

Sean Udall is the author of the TechStrat Report, a tech focused newsletter. The following is a free sample. Take a free trial!

A reader recently wrote to ask me if it's time to sell Apple. It's an interesting question that deserves a full answer, especially as calls of an Apple top are becoming more frequent.

I've articulated my views on selling/trimming Apple (AAPL) in a variety of articles last year, so I'll recap some of my views here.

First, let's say you or anyone has been in Apple for some time as I have been. I would think it has been prudent to trim it and to have done so more than once in the past few years. However, that depends on many factors, such as holding period, purchase cost, liquidity, risk, etc.

As readers of Minyanville know, I have been in Apple since before they made the iPod, when the stock was a cash-rich turnaround story. However, my biggest move on the stock occurred in 2006, when the stock dropped from the $80s to the low $50s on fears related to Steve Jobs and stock option backdating.

This actually cleared during a quarterly conference call, and I remember as I was buying stock in the after hours on the way from $50 to $55. I was also very active and aggressive on the shares after FAS157 was relaxed in March 2009. From these points until last year, Apple was my largest position, and I've traded around that large core position possibly hundreds of times during that five-year period.

I share this information for a couple reasons. First, on a true secular growth story, a stock will almost always provide opportunities to get in the name without chasing it at a multi-year highs. And I would be careful chasing Apple currently, even though it just seems like the most obvious pre-earnings play in history.

The second reason is just look at the price levels. Just since mid-2006, the stock has run from $50 to the $420s. Now unlike many stocks, this run has been more than 100% deserved. In fact, as written, the stock's earnings have grown faster than the share price, thus the very low multiple today. That multiple looks even more ridiculously cheap if you factor in the amount of cash Apple has added to its balance sheet over the last three years: $45 billion.

What I fear today is that I feel many people pounding the table on the stock in money management, print, media, and myriad blogs, likely have jumped on the name fairly recently. They act like they will strongly support the stock and want to buy it lower, but if push comes to shove I suspect a lot of weak hands are in the name now relative to in years past.

Also, I have outlined that I just don't like Apple going proprietary with chip -- and now flash memory -- development. This is cutting out business partners and alienating the massive research and development engine that is the semiconductor industry. If Apple does face a huge problem in the future, I think this will be the root of it, and if you connect the dots, it's not too hard to say that the chip industry is doing everything it can to make sure Android and the new Windows (MSFT) smartphone platforms have the best chance of proliferating and growing.

Conversely -- I want to make sure this doesn't sound like an Apple hate piece. The stock is ridiculously cheap, and frankly I believe Apple is trading below where it should be. I still feel the stock can trade into the low/mid $500s. I have maintained this view for some time now.

Further, I can see a path to a much higher price in the shares. I talked about this in my Yahoo video with Jeff Macke and have written in-depth in the TechStrat newsletter.

This would require that the next iPhone be a lot better than the iPhone 4S, and my path to a huge boost in Apple's potential lies in what it does to counter the Ultrabook challenge. If it comes out with the best "Ultrabook" in true Apple style, then it could effectively corner another huge computing growth market. This would be a greatly improved iPad/MacBook Air combo, which is a dual-mode device (people seem to want to call these convertibles). I like dual mode, but the world is winning. At any rate, this is a laptop/tablet all-in-one device where you can pull the screen away from the keyboard and use it as a tablet only.

If Apple does the above, then I will move my $500s view up by a good margin, by at least $200. That said, the future innovation decisions and execution by Apple are becoming far more critical, and the competition has upped the bar meaningfully. For all that and other reasons, I trimmed Apple meaningfully in the first half of 2011 and maintain that other stocks offer significantly more upside in the coming weeks/months.

Please see my Top 10 Tech Picks for 2012 -- examples are Google (GOOG), Broadcom Corp. (BRCM) and Juniper Networks (JNPR).

See also: Apple: Dismantling a Bearish Argument Against the Tech Powerhouse Read

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