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Adding to My Long Position in Apple

I am adding to my long position in Apple now that it is trading in the mid $400 range. Though I tend to like to eat humble pie alone, I admit to going long when Apple was in the mid $500 range and was surprised to see the depth of the recent plunge beyond my initially lower range expectations of $475.

That being said, I take it as an opportunity to add to my position given the advantageous entry point afforded by the street's reaction to their latest earnings report. I do not tend to like to recommend equities at this juncture given my belief that the stock market, in general, is overvalued. I believe the market is insufficiently discounting economic fragility and generally slowing-to-flat corporate revenue growth. However, Apple is one particular stock recommendation I can and will make despite the overall market condition. What I cannot pretend to have a clue about is the timing one may have to endure to be rewarded for a position in Apple at this point. Here is why...

On the downside for Apple, the upward trend has clearly been broken from a technical standpoint (see chart below). Apple is without its visionary (Steve Jobs) at the helm and Cook is not Steve Jobs by many measures. Wall Street has set the expectations bar exceedingly high from quarter to quarter, making it hard for Apple to have an earning's beat, even with record setting results. Samsung and Android are making a dent in Iphone sales and the tablet market has plenty of competition. Apple's products are typically higher cost retail items that could suffer a slow down in demand if the economy should weaken further. And those are just a few of the primary negatives potentially assailing the stock...

So why would I recommend a long position?

- Apple's cash balance represents approximately ONE-THIRD of its total market cap! (i.e. only two-thirds of its stock value is currently forward looking).

- Apple's PE ratio is currently under 10. By way of comparison with the overall stock market, the S&P 500 PE is currently north of 17. Translation: Apple is at the lower end of historic price-to-earnings ratio ranges, an opportunity to pick the stock up inexpensively relative to the market--and Apple likely has a lot more proportional growth potential than the overall market (and thus, potentiall deserves a PE ratio at or higher than the market's).

- Apple's Fwd PE ratio is currently at 8.6, nearly half of the S&P 500's consensus estimate. (i.e. same comment as above, just on a more forward-looking basis)

- If you factor in Apple's incredible cash position (nearly $150 Billion and growing), its current PE is closer to the upper 6 to lower 7 range. (i.e. at these levels, you are paying value prices for what I believe remains a growth stock).

- Apple has not even begun to reach market saturation with one of their highest margin products: mac and personal computing products; nor have they tapped China's growing middle class with many of their most popular product lines. (potentially more room for earnings growth down the road)

- It also does not hurt my confidence that many on Wall Street are beginning to prognosticate all manner of trouble for the stock going forward. These are the same analysts that were super bullish when the share price was at $700. From a contrarian perspective, this is a positive.

Bottom line: Given my overarching concern with the stock market's valuation (and I believe it is overvalued), I believe a long position in Apple could likely be a longer-term hold to take advantage of eventual gains. Nevertheless, I am making the recommendation because I believe Apple has reached a level of long-term undervaluation driven by shorter-term circumstances and expectations that longer-term performance will likely reveal to be short-sighted (puns intended). I recommend buying Apple stock at this level (mid $400s) and looking to eventually reclaim at least the $600 price range over the next 12 months or so for an approximate 33% gain (remember, timing is a stab in the dark with the overall market overvaluation). If it takes 3 years to recapture $600 that would still be north of  a 10% annualized return, which is not too shabby in this current environment.

PS: In keeping with normal risk management, you should not build a position any greater than 2-3% of your total net worth in this stock and you should not invest capital that you may need in the short-term.

Written By: Joshua Ungerecht
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AAPL, Apple, Equities, P/E Ratio, Price-to-earnings ratio, Stock Market, Stocks