I have been writing about markets for about two years now, and have been contributing daily to the Market Musings column for just over one. In that time, themes have come and gone. The fiscal cliff, the possibility of another tech bubble, the housing recovery and others have all attracted a lot of words over the last couple of years. There has, until recently though, been one consistent, surefire way to attract readers; use the ticker symbol AAPL in a story.
The appetite for news and views on Apple stock was voracious for most of the last two years. Back in June of 2012, “How high can it go?” was the relevant question. Analysts were falling over each other to place ever higher price targets on the stock; I see your $1000 (pre-split) prediction and raise you to $1200 etc. At that time, I made an instinctive trader’s call that the hype was overdone and that the rule of large numbers was about to apply to the company’s growth. When it came, the fall was spectacular, and that is what made AAPL the thing that everybody wanted to hear about and therefore to write about.
There were, you see, a whole lot, bunch, or mess (insert your regional preference) of retail investors who had believed the analysts and couldn’t see any downside to the stock. They had bought in as the stock continued to jump up through the $600s. When it collapsed in a heap they were left long and wrong and were desperately looking for news and a chance to cut their positions. At that time, anybody who knew or discovered that I wrote about markets had only one question “What do you think about Apple?” As the stock has recovered over the last few months that obsession has faded.
Obviously, this is anecdotal evidence and the plural of anecdote is not data, but twenty years in trading rooms taught me to listen to the world around me and to use what I hear to inform my decisions. People have, it seems, become a little bored with Apple. Maybe they have cut their losing positions or, now that they are back to somewhere around flat, have resigned themselves to holding the stock forever. The recent 7:1 split would have helped in that regard. I am not sure why, but holding 70 shares in something that has woefully underperformed over the last two years seems to feel better to most small investors than only holding 10.
This growing ennui among the investing public when it comes to AAPL is a good thing. As individuals and pundits have lost the need to over-analyze every little detail regarding the company and its stock, so focus has gradually shifted back to where it should be; the fundamentals and long term prospects. On that basis, even with the recent run up, AAPL looks like a solid buy.
Back in 2012 when I wrote that AAPL was looking toppish around $700 the defenders of the stock were maintaining that it was still cheap based on a forward P/E at the time of around 13. That same metric is now around 14, but whereas AAPL was expensive then it is cheap now. The difference is in the expectations. Forward P/E is based on consensus analysts’ estimates for future growth and, as I pointed out above, Wall Street at that time seemed to be involved in something akin to a game of chicken; who could predict the most explosive growth for Apple? Estimates now are more realistic; indeed may be somewhat conservative.
The consensus is that Apple will grow earnings by 9.2% next year, significantly lower than the overall market, as the S&P 500 EPS is forecast to grow by 12.2% in that time. As we saw in 2012, those forecasts can be horribly wrong, but at least with these more realistic numbers there is a chance that they could be too low as well as too high. 9.2% certainly compares favorably to the 30+% growth estimates of 2012. Given the rapid expansion in China, the possibilities unleashed by the recent acquisition of Beats, and the prospect of some real product innovation this year, I would posit that the current estimates are most likely too low. A reluctance to get caught up in the same trap on a “once bitten twice shy” basis would be understandable for analysts but there would seem to be a degree of overcorrection.
Ultimately, what will drive the price of AAPL over the coming months and years is the success or otherwise of the initiatives mentioned above. For now, though, the toning down of public interest and the natural tendency of Wall Street to underestimate the company’s potential in order not to repeat a mistake has left us in a somewhat paradoxical situation. Just as the investing public has stopped searching desperately for good news about Apple there is plenty of it to be found, and just as analysts have toned down growth forecasts growth looks set to resume in earnest. All of this adds up to AAPL remaining one of the most solid plays in an otherwise fairly valued market.