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How Wall Street Put Apple Stock in Animal House

3 | By Michael A. Robinson

I bet you don’t know about the connection between tech investing and that 1978 comedy classic Animal House.

It has something to do with the very recent history of Apple Inc. (Nasdaq: AAPL) stock.

And for investors like you, there’s a very powerful lesson to be learned.

Today I’ll “whisper” that lesson to you.

And then I’ll show you how you can use it to increase the value of your portfolio…

“A Little-Known Codicil”

If you lost too many brain cells while watching this flick starring the late John Belushi, let me refresh your memory.

Animal House follows the hijinks of a group of misfit fraternity brothers constantly in trouble with their college.

In one of the film’s more memorable scenes, we learn that these Deltas are in so much hot water that Dean Wormer has put them on “double secret probation.”

Something similar has happened to Apple since it joined the Dow Jones Industrial Average in March and became the bellwether technology stock.

I’m referring to the impact Wall Street’s “whisper earnings” had on Apple stock on Wednesday. That day, shares of the iDevice King dipped more than 4% – despite stellar earnings.

Here’s how it happened…

Wall Street Whispers

Like most investors, you know that each and every quarter stock analysts issue their forecasts for sales and profits on the companies they cover. These are the “official” projections.

But many bullish analysts have unofficial targets, and those numbers get whispered around Wall Street.

And right now, tech analysts seem to be competing with each other to forecast the highest possible target price for Apple stock. By doing so, they hope to drive more sales to their brokerage houses – and bolster their reputations.

So that makes these Apple “whispers” an unhealthy blend of greed and ego.

And when the company in question doesn’t actually beat the whispers, that can lead to a sharp price decline – even if the firm reports sterling financials.

That’s exactly what happened when Apple came under pressure earlier this week, losing some $60 billion in market value in just a few hours of trading.

And that makes it a classic overreaction based on unrealistic expectations.

Back in October 2013 I was among the first to suggest that Apple would hit $1,000 – or, a split-adjusted price of $142.85. At the time, no doubt that sounded very aggressive.

But these days, it seems pretty conservative. I’ve seen short-term target prices for Apple as high as $195 per share.

It’s almost like there’s an unspoken competition on Wall Street to see who can come up with the highest target for Apple sales, particularly regarding the iPhone.

In the June quarter, the mega-cap firm sold 47.4 million iPhones, a 35% jump from the year-ago period. That massive sales record helped the Silicon Valley legend boost profits by 38% in the period to $10.7 billion.

Not only that, but the average selling price for an iPhone was $660 in the third fiscal quarter.

That’s a huge win.

Despite the adverse effect of the dollar’s rising value in foreign markets, Apple increased the iPhone price average by close to $100, for an annual jump of nearly 18%.

But that stellar performance just wasn’t enough to satisfy the most bullish analysts, some of whom were hoping to see sales of 49 million units – or more.

And in overreacting to Apple’s news, the Street missed several key factors that show enormous strength for the company.

Let me show you some of them.

“Smart” Moves

Let’s start with just how important the iPhone has become for the entire smartphone market.

Since Apple released the iPhone 6 and 6 Plus on Sept. 19, it has sold 135.7 million of them around the world.

But that’s only half the story. Even though the iPhone accounts for only about 20% of the handsets sold around the world, Apple garners by far the lion’s share of profits.

Researchers at Cannacord Genuity earlier this month estimated that roughly 1,000 companies make smartphones. Of those, only eight rank as market leaders.

And from a profit standpoint, only one smartphone maker matters – Apple accounts for 92% of profits in the space. That’s a 41% increase from a year ago when Apple commanded 65% of smartphone profits.

Meanwhile, the company continues to conquer China. Though it didn’t provide unit sales, Apple said sales there more than doubled to $13.2 billion as iPhone deliveries soared some 87%.

All of which helps explain Apple’s uncanny ability to generate cash flow. The company ended the June quarter with $203 billion in cash on hand, a record amount.

According to data compiled by The Wall Street Journal, Apple now has more cash on hand than International Business Machines Inc. (NYSE: IBM), Microsoft Corp. (Nasdaq: MSFT) and Google Inc. (Nasdaq: GOOGL) combined.

And Team Cupertino is pretty much on track with my sales estimates for the new Apple Watch. I’ve projected first fiscal year sales for the Apple Watch of 10 million units.

A number of analysts parsed the number for sales of the new wearable device and came up with a consensus range of 2 million to 2.7 million.

Yet, some on Wall Street were disappointed – probably because Morgan Stanley had projected Apple Watch sales of 30 million to 60 million units in the first year alone.

In its first quarter on the market, the smartwatch accounted for more than 100% in the increase of Apple’s “other products” sales to $2.64 billion. That was clearly more than enough to offset the decline in sales of legacy products like the iPod.

On a conference call with analysts, CEO Tim Cook indicated that watch sales are building, with June deliveries higher than in April or May.

“I realize that’s very different than what is being written, but the June sales were the highest,” Cook said. “And so the watch had more of a back-ended kind of a skewing.”

So, there’s a lot to show the company is still on solid ground. Having said all that, I do see one area that’s weaker than I’d like but at this point it’s not a cause for concern.

The company forecasts sales for the current quarter just below expectations. Apple sees sales between $49 billion and $51 billion. Analysts polled by Thomson Reuters had expected revenue of $51.13 billion.

Much of that can be explained by the June quarter’s huge success, meaning that Apple pulled some of its traditional back-to-school sales forward.

Overall, this is a tech giant with a lot of upside left. The company has a market cap of $714.23 billion and opened today at $125.32 – a price that still seems like a bargain.

Consider that the stock trades at roughly 13 times forward earnings. That means you can buy the world’s most profitable tech company at a 28% discount from the Standard & Poor’s 500 Index’s forward earnings ratio of 18.

In other words, despite Wall Street giving the stock the Animal House treatment, you can count on Apple to build your net worth over the long haul.

And a good way to do that would be to buy on the kind of dip we’re now seeing and add to your overall profits.

P.S. I hope you all are “Liking” and “Following me at Facebook and Twitter. We’ve got a great community there who are eager to make big money in tech stocks today.

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3 Responses to How Wall Street Put Apple Stock in Animal House

  1. Paul says:

    So will this continue at every earnings report and keep the share price down?Seems like options traders and hedge fund managers are controlling the growth of this stock,more so than any other.

  2. G13Man says:

    so i went with your estimate and got slaughtered !

    well no , i played weekly shorts for protection and broke even .

  3. Catharina Thorne says:

    Hello Mike,

    If Apple sales are doing so well why has NXP Semiconductors dropped so sharply?
    I am baffled.

    Greetings from

    Catharina.

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