Thursday, January 24, 2013

"Operation Barn Door" and Apple

A former colleague of mine used to quip that "operation barn door" had taken place after an investment decision--usually by senior management--well after the damage had already been done.  I see this now with Apple stock.

In response to yesterday's earnings announcement by the company that disappointed many, the shares are expected to open 10% lower today.  That would bring the total decline in the stock price to 35% since it peaked at $705 late in the summer before the launch of the iPhone5.

After the company's announcement late yesterday (after the close of the stock market), one prominent analyst reduced his rating on the stock from "buy" to "hold" along with his price target from $800 to $500.  Is the stock really worth 40% less than it was an hour earlier?

Yet, that is the behavior of the herd-following analysts (and many portfolio managers).  They couldn't get enough of Apple on the way up, as it was a "must own" stock that caused many portfolio managers to trail their index benchmarks because they didn't own the stock--or didn't own enough of it compared to its weighting in the benchmark index.  Analysts repeatedly raised their price targets on the stock, and when the stock reached $700, analysts tried to outdo each other in their enthusiasm for the stock, with some setting price targets of $1000.  

So less than six months later, with the stock at $465, the same analysts are racing to cut their price targets and ratings on the stock.  Again, this is only after the stock has fallen 35%.  Thanks a lot for that advice.

The stock now has a p/e multiple on current-year earnings of 9 (or only 7 if the cash on the balance sheet were used to buy back stock).  The balance sheet is in superb condition, with cash equivalents equal to almost one third of the company's stock market value.  I'd resist the crowd and wade in to buy Apple today.

Steve Lehman

Apple:  $465

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