Time to Take Another Bite of Apple?

11/15/2011 3:35 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Could today mark the turn for Apple (AAPL)?

Apple shares are up 2.3% today as of 2:45 p.m. New York time. An up day has been unusual for the stock ever since it fell short of analyst expectations when it announced earnings for the fiscal fourth quarter (that ended on September 24) on October 18.

But today the shares have advanced, on reports of October retail sales that show solid growth in sales of consumer electronics. And that has raised hopes for holiday sales of electronics—including the iPhone and the iPad.

Even with today’s gain, the shares are down 8.2% from the October 18 high of $422.24.

I think it’s too soon to say that Apple shares are headed straight up from here. A stock doesn’t shake off its first earnings miss in six years quite that easily. I think Apple still has to prove that last quarter was a fluke by reporting stronger than expected earnings for the fourth quarter.

But I think we’re seeing the beginning of the retreat of the pessimism that has surrounded the shares ever since the death of Steve Jobs.

The molehill problem in third-quarter earnings—that Apple had sold fewer iPhones than projected, probably because the new iPhone 4S had cannibalized sales of older models—has somehow turned into a mountain that Apple shares haven’t been able to climb.

There have been, for example, battery problems with the iPhone 4S and the new iOS 5.0.1 operating system. A bug in the operating system has led to faster than advertised battery drain—with some users reporting a 70% battery drain in 6 hours. (Apple advertises eight hours of talk time for the 4S.)

An update to the operating system has fixed the problem for some users, but left others still complaining on Apple online support forums of continued battery problems.

And there have been more than enough worried analyst reports from Wall Street to raise doubts about iPad sales in the quarter that ends in December (Apple’s first fiscal quarter of 2012.)

In the company’s September quarter, iPad sales came in at 11.1 million, instead of the 11.7 million that Wall Street had expected. And inventory in the sales channel rose in the quarter to 2.5 million units, from 1.05 million in the prior quarter.

That has led to all kinds of speculation:

  • That Amazon’s Kindle Fire, on sale as of today, will cut into iPad sales
  • While the anticipated March 2012 upgrade to an iPad 2S or iPad 3 will cannibalize sales in the current quarter
  • And after Amazon (AMZN) lowered the introductory price point for the Kindle Fire to $200, possibly forcing Apple to cut iPad prices.

The battery problem is a fleeting issue that will go away relatively quickly, just as earlier antenna problems did with the last iteration of the iPhone. Worries about iPad sales won’t be put to bed until Apple announces earnings for the first quarter of its 2012 fiscal year on January 18.

That’s especially the case since the issue behind much of this worry is really about the management team that has followed Jobs. It’s hard replacing an icon.

Tim Cook, Apple’s post-Jobs CEO, doesn’t have to prove that he’s the second coming of Jobs. But he does need to put to rest the nagging doubts that Apple won’t be the same without the man who had become to investors the face and spirit of the company.

I still think Apple is an incredibly undervalued stock, and that there’s a lot more earnings growth in the pipeline. I think the stock is reasonably priced at $390 or so, but I’d really like to get shares near the $363 level of the 200-day moving average.

 Long-term, I love the stock. Short-term, I’m still bargain hunting.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple as of the end of September. For a full list of the stocks in the fund as of the end of September, see the fund’s portfolio here.

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