Reconstructing Apple

As Apple’s stock price continues to decline, it becomes cheaper on a fundamental basis.  There are times within a stock’s price history that it relative value discounts from the actual market value.  Is this one of those times for Apple?

A key question investors are asking themselves is what will drive the stock higher?  This quarter’s earnings report shows the slowest growth in almost a decade and margins may be compressing due to pressure to serve lower price markets and a change in product mix.

Is Apple going the way of Microsoft where it is a huge generator of cash but cannot move the needle on growth because of its massive size?  Think...The Law of Large Numbers courtesy of the Kahn Academy and a partial definition below from  Investopedia

• If a large company continues to grow at 30-50% every year, it would eventually become bigger than the economy itself! Obviously, this can't happen and eventually growth has to slow down. As a result, investing in companies with very high market capitalization can dampen the potential for stock appreciation.

As you can see, there are more questions than answers.  What is clear is that Apple’s stock was heading to the moon up until it hit the $700 mark and then from there has been in a complete free fall.  It has blown through the key technical support of $500 and the next level of support looks to be around $425.  If the stock did reach back down to $425 per share, that would represent a drop from it's high of nearly 40%.

Full disclosure, we currently are long the stock and long an option position that doesn't expire until January 2014 in our TAMMA Fund.  We also hold Apple positions in our client managed accounts.  With that said, we are going to hold onto Apple for now and would look to be buyers around the $425 price.

While growth may be slowing we believe that other catalysts and opportunities will present themselves such as TV and delivering lower cost product to more of the mass market will certainly help to expand the massive brand.  Margins may not be as high as the last few years but cash flow will certainly grow.  This could lead to an increase in the dividend, special one time dividends, and/or future acquisitions.

Reuters article

Marketwatch article