Wrong time to cool on Apple stock

BOSTON (MarketWatch) � It has become a popular sport among investors these days to bash Apple Inc. stock and forecast what some denizens of the message boards are calling �the inevitable fall.�

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Indeed, it�s not hard to find investors in many of the online communities making the case for getting out of the technology giant, expecting a correction or something much worse, usually with creatively dull lines about how apples always fall off the tree or get picked and eaten.

You�ll also hear arguments about how Apple AAPL �is much more of a trader�s stock than something held by individual investors, how at 17% of the Nasdaq Composite�s COMP �value it basically is a proxy for the entire tech market, or even how � with its giant market-cap � Apple dictates the entire stock market�s direction.

Facts vs. feelings

That market noise prompted Mark from Richmond, Va., to write, wondering if he should get out. �I love Apple as a company and a stock, but I have a good profit in the stock and people keep talking about a correction or worse. � Apple has gone so far up, and that means it has so far to fall, so while I think the stock might turn back for a little while, I was thinking I might sell and buy it back in the future.�

Selling Apple right now � whether it is unloading shares or betting against the company through short sales or options � would be the Stupid Investment of the Week. Stupid Investment of the Week highlights the conditions and characteristics that lead investors to make less-than-ideal decisions about securities.

This is the first time in the history of this column � nearly 10 years � that a stock has been featured as a bad sell, rather than a poor purchase.

Accordingly, this column should not be construed as an automatic buy signal. It�s entirely possible that Apple�s naysayers will be right and the stock will take a significant step back; that would dismay anyone buying in at current prices, but the average investor who has shares now and who takes a long-term view is likely to feel better for having weathered the bumps.

/quotes/zigman/68270/quotes/nls/aapl AAPL 584.00, +14.95, +2.63% /quotes/zigman/3870025 SPX 1,362.16, +33.12, +2.49% Apple vs. S&P 500

�Feeling� is important with Apple shares in large part because of the price. At roughly $580 a share � and already up 40% so far this year � the stock �feels� prohibitively expensive, and like it must be due for a fall. With an annualized average gain of 66% over the last three years, there�s a lot of �nothing goes up forever� talk around Apple, and reminders of how the last time the stock suffered a bad year, 2008, it shed 57% of its value.

But price is a relative concept, and as hard as it may be to believe, Apple at $580 a share is still a bit of a bargain.

�A big problem with Apple is that there is a lot of anchoring � people getting stuck on certain price levels and digging in,� said Charles Rotblut, editor of AAII Journal. �It was $300 or $400 and they say �I don�t want to pay $600 for a stock, it�s come up so much that it�s overpriced. It�s easy to miss that a stock at $20 can be a whole lot more expensive than a stock at $600. It�s all about where is it trading relative to earnings.�

In Apple�s case, the current price/earnings ratio is roughly 14, and the company is trading at under 12 times forward earnings. Investment researcher Morningstar Inc., for example, has a fair-value estimate of $670 on the stock, some 15% above current levels; its analysts believe an appropriate selling point would be closer to $900 per share.

Nervous Apple investors can also find calm in the company�s cash stash of more than $110 billion, or roughly $120 a share. While Apple currently pays no dividend, that will change going forward, giving nervous investors some downside protection.

Bytes and bites

That�s not to say that the naysayers haven�t got their points to make. With nearly 75% of Apple�s revenue coming from the iPhone and iPad, if either of these product segments ever has a disappointment, it will cut into the stock�s fair-value estimate.

Apple�s sales are heavily concentrated in the U.S. and its high-end products are economically sensitive. It is unclear whether Apple will be as widely accepted in international markets, and particularly the emerging markets, where the boom in personal communications devices will drive the global business in the future; if Apple can�t capture the growth in those markets, future revenue growth will slow considerably.

Further, there is a long list of once-great consumer companies that have stalled and fizzled just when it seemed their run would last forever. Many of those stocks, however, traded in the �nosebleed area� at that point, while Apple is not, said Brent Wilsey of Wilsey Asset Management in San Diego.

�Investors want to pay a low price for future growth, and Apple is the best deal in town,� Wilsey said. �I know some worry that the market cap of Apple is approaching $600 billion, which they see as the top because, in the past, companies like GE �and Microsoft hit those levels only to fall. Investors fail to realize that at those high-market caps, those companies also had very high valuations, P/E�s of 40 to 50 times [earnings].�

Rotblut also noted that the average investor who lets the high current share price drive them out of the stock now will never find a price point where they are comfortable getting back in.

�The average investor has a tough time buying a stock that is at $100 a share, let alone $300 or $600 a share,� Rotblut said. �If you are an Apple investor and you believe in the long-term prospects of the company, you can�t let the noise � or even a correction � get you to sell the stock, because you are never going to find a point where you are comfortable getting back in. If you own the stock now, you may have to ride out some disappointment, but it�s hard to think you won�t be happy owning it three or five years from now.�