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What Apple Should Do to Reclaim Star Status

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MoneyShow's Jim Jubak details how the tech giant can bounce back.

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But I don't think there's any more reason to believe the analysts' pessimism now than in the optimism of three months ago. iPhone volumes climbed 29% year over year even though Apple just started selling phones in China and even though the iPhone 5 isn't slam-dunk better than the newest Samsung models. In iPads, Apple grew volumes by 48% year over year in the quarter and claimed 56% of market. Sure that share will erode, but remember the analysts who talked about the key Apple advantages of total control of the hardware/software experience and the huge and integrated app store? Well, they were right. Those are huge advantages and they didn't vanish yesterday.

I think Apple the stock as opposed to Apple the company has had a problem for the last quarter-the stock was over-owned and without the excitement of the Next Big Thing -- and the need for a Next Big Thing to be even bigger than the Last Big Thing -- there was a scarcity of new money to flow into the stock when it hit $706 back in September.

The stock is 36.2% from that high. After four months of almost constant selling and at $450.50 instead of $706, I think it requires a lot less excitement to drive money into the stock.

But it will require some. Wall Street analysts are cutting ratings and target prices hand over fist and that does generate downward momentum on the stock. After four months of selling, investors are going to be understandably reluctant to jump in at $450 (after all they jumped in at $600 and $550 and $486) until they see some sign that they're not attempting to catch a falling knife.

So, yes, I think Apple could drop further from here or wallow around at this level not going anywhere for a while until investors can see a catalyst.

What might a catalyst be? Apple could announce a big buyback program or another special dividend that would use up more of the on-shore cash in Apple's vault. It could announce a number of big deals to increase the universe of wireless carriers that sell iPhones. (Apple still doesn't sell iPhones through some of the biggest carriers in developing economies.) And third, it could announce a new iPhone and iPad and Macintosh refresh cycle that's earlier than now expected.

I don't see any of that happening tomorrow. May or June is likely. March is possible. But I don't think any earlier.

So even if you believe that Apple's business model isn't broken and even if you believe that Apple's competitive advantages haven't all vanished almost overnight, you'll need patience.

Back in September I put a target price of $760 on Apple in my Jubak's Picks portfolio. On the fundamentals I still don't think that's unreasonable. If Apple only grew earnings in fiscal 2013 by the 9.7% that analysts now project, at $760 Apple would trade at a price to earnings ratio of 15.6 at the end of 2013.

But investors trying to value Apple are looking at a much more skeptical universe than four months ago. Given that skepticism, I'd set a target of $600 by September. That would be 13.5 times projected earnings.

And $600 would be roughly a 33% gain from here.

That sounds good, right? But I think you'll earn it for all the patience you'll have to expend and all the sleep you'll lose to volatility.

Editor's Note: This article was written by Jim Jubak of MoneyShow.

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No positions in stocks mentioned.
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