Tags: Apple | Rally | Bear | Market

An Apple Rally a Day Keeps the Bear Market Away

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Tuesday, 06 Mar 2012 10:16 AM Current | Bio | Archive

“If we go first thing Sunday morning, it’s totally empty. There are only 40 or so people instead of over 100.”

That was the explanation I got from a family member who hasn’t been to church lately. No, he’s not hitting up a brunch buffet. And he’s not going to any sporting event.

Rather, he’s taking up studies. Specifically, he’s learning how to use his iPhone, iPad, and Mac at the local Apple store.

Apple (AAPL), without a doubt, is the most talked-about stock today. The success of the company at a time when other firms have languished stands out. But, some wonder, is the company too successful? Is this the best the company will ever do before it falls apart? Let’s consider some facts…

The stock alone is responsible for 16 percent of the weighting of the NASDAQ. Back out Apple’s earnings from the overall stock market, and the picture for stocks in general isn’t so pretty.

Apple is the most popular stock hedge fund managers hold in their portfolios—typically a dangerous sign. As long as the stock keeps rallying, there’s no problem. But when most traders are on one side of the trade, a small selloff can become magnified. And, it begs the all-important question: Where will new buyers come from?

There are other concerns as well. The stock recently broke the $500 billion market cap club. Prior members have included Microsoft, Cisco, GE, and Intel—before the tech bubble burst and these shares sold off to less than half of what they used to be. In short, reaching a size of $500 billion may signal that it’s time for shares to come back.

Yet, curiously, Apple isn’t valued the way tech stocks were in 1999-2000.

Shares trade around 14 times earnings, a slight discount to the S&P 500 ratio. The company is a vacuum for cash—over $97 billion cushions the company against losses.

As most expect the company to continue to deliver popular products over the next few years, there have been calls for Apple to do something else with the cash than simply pile up. A dividend may be on the way. A share buyback is less likely at these prices, and given the company’s expected future growth.

There could be some acquisitions, but since most of Apple’s products are developed in-house, there’s little need to buy another company.

Nevertheless, there’s the case to be cautiously optimistic. Apple’s products have created acolytes. Only a few companies like Disney and Harley Davidson generate such strong support from their customers.

Ultimately, the biggest detriment to Apple’s rise is the price of its shares—a lofty $545.

Most investors may not be able to shell out over $50,000 to buy a lot of 100 shares. Fortunately, there’s a large market for Apple options. Investors with a bullish bent can purchase call options, and bears can use put options. My money is on Apple’s rally to continue.

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2012-16-06
Tuesday, 06 Mar 2012 10:16 AM
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