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Why Investors' Inexplicable Disgust for Apple Is Misguided

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The company's position is a little shaky, but there's no reason for all this panic.

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It's not good news that Apple's earnings per share have dipped for the first time since 2003, but it's equally absurd to react in this way to a slightly disappointing earnings release by a company sitting on some $137 billion in cash. Strip out that cash and Apple is trading at seven to eight times earnings – the kind of valuation you'd expect to see for a company in active distress, or one whose business model is facing major headwinds. In Apple's case, it's simply a matter of question marks hanging overhead.

The recent memorable gains in Apple's share price may be part of the problem. When the stock hit $705 per share, that was probably an example of irrational exuberance at work. But the current price may be irrational pessimism. These valuations don't make sense.

Apple has growth potential – simply not the same explosive growth potential of recent years. That's not to suggest that under new CEO Tim Cook it can't find another string of new and innovative products, or take other steps to make itself alluring once more. It has a track record of developing category-killing products and making them speedily and efficiently, and there is no reason to believe that ability died along with Steve Jobs.

Apple also has all that cash. During the earnings conference call, chief financial officer Peter Oppenheimer said Apple continually ponders the idea of stock buybacks. Should it decide to return cash to investors that way, or by raising the dividend, the company would instantly become even more attractive to yield-hungry investors in quest of a call option on growth.

Is this the time to go out on a limb and snap up the stock? Not if you keep an eye on momentum or market psychology, both of which suggest that it would be a very, very bad decision. Investors seem to want to remain bearish about Apple; to view the cup as half empty. Apple has an image problem. At some point, something will come along to change that, but the catalyst isn't in sight today. Plus, as Birinyi Associates cautioned in a report to clients earlier today, regardless of the immediate response by Apple's stock to the earnings announcement, the day after sees Apple trader lower more than two-thirds of the time.

Right now, owning Apple is about playing a waiting game, and it's not one for the faint of heart.

Editor's Note: This article by Suzanne McGee originally appeared on The Fiscal Times.

For more from The Fiscal Times:

13 Stocks That Have Outperformed Apple


Apple Finds That iPhone 5 Rumor Mill Can Be a Grind

The Smartphone Wars: Is Apple's Dominance Over?

Follow The Fiscal Times on Twitter @TheFiscalTimes.
No positions in stocks mentioned.
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