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It’s Time to Catch the Falling Apple

February 26, 2013 – by Richard Band

Last week, the stock market’s boiler was on the verge of exploding … and the result would have been a mess. Happily, some of the pressure has come off, meaning we can start looking to values we’d like to add to our portfolio.

Apple (NASDAQ:AAPL) comes to mind.

Could Apple Go the Way of Dell?

On the face of it, Apple seems astonishingly cheap. If we net out the two companies’ cash hoards, AAPL is selling for approximately the same multiple of actual, reported 12-month earnings as Microsoft (NASDAQ:MSFT).

If past growth were the only consideration, you would have to believe that AAPL deserves to trade at a premium to MSFT.

On the other hand, it’s good to remember that Apple is primarily (though by no means exclusively) a hardware company — and it’s exceedingly difficult for computer-hardware companies to maintain their competitive edge over the long run. For instance, Dell (NASDAQ:DELL) was a champion not too long ago.

Already, we’re hearing grumbles that Apple product — notably the iPhone 5 — are “too expensive.” (The telecom carriers hate the princely subsidies they have to pay to get customers to buy iPhones.) If competition and consumer resistance force AAPL to cut prices and accept lower profit margins, the company could generate much slower earnings growth in years to come than the consensus now assumes.

I’ve been waiting for the evidence to suggest that the momentum herd has largely exited the stock. An enterprise with $137 billion of cash on its books isn’t about to go poof.

Price, Dividends Are Lining Up

In recent months, investor perceptions of the company have undergone a tectonic shift. People are starting to realize Apple is now too big an enterprise to keep growing at the heady rates of yesteryear. As momentum-driven “growth” investors exit the stock, the share price is coming down to levels that have begun to make sense for long-term value investors.

While David Einhorn’s quixotic crusade to get AAPL to issue a special class of preferred stock seems to be running out of gas, I think CEO Tim Cook will soon persuade the company’s board to do something much more dramatic and effective. Possible steps at tomorrow’s shareholder meeting include a monster dividend increase, a stock split or a buyback — or perhaps all three at once. I figure AAPL could raise its dividend 50%, buy back $20 billion of stock annually — and still not put a dent in its cash pile!

Should we see an announcement like that, we could see an end to the exodus.

Already, the shares yield 2.3%. At less than 10X estimated year-ahead profits, and zero debt, this premier technology franchise simply looks too cheap. From current levels, I’m projecting a total return — dividends plus capital appreciation — of about 20% to 30% in the next 12 months.

Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk “value” approach has won seven “Best Financial Advisory” awards from the Newsletter and Electronic Publishers Foundation.