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Value Expert Bites into Apple

02/07/2014 8:00 am EST


John Buckingham

Editor, The Prudent Speculator

While pullbacks, corrections, and even the occasional bear market are normal occurrences, I am still of the mind that the current downturn is not the start of something much worse and that it will ultimately prove to be the pause that refreshes, advises value investor John Buckingham, editor of The Prudent Speculator.

Though there are plenty of issues about which to be concerned, we have no reason to think that the current weakness will prove to be anything other than temporary and we offer the timeless advice from legendary fund manager Peter Lynch, “The key to making money in stocks is not to get scared out of them.”

Looking at the tech sector, perhaps the highest profile amongst the earnings goats belonged to Apple (AAPL).

The consumer electronics giant watched its stock shed some $50 (about 9%) in the four trading sessions after announcing fiscal Q1 profits of $14.50 per share, compared to the consensus analyst forecast of $14.07, on revenue of $57.6 billion, slightly above the $57.5 billion estimate.

I remain a strong supporter of the stock, even though the company's weaker-than-expected revenue outlook for the current quarter compelled us to trim our high valuation to $746.

We understand that markets are always forward-looking, and conservative sales guidance (due to inventory issues, lower iPod sales, and a stronger US dollar, along with worries about the growth of the iPhone biz), had short-sighted investors hitting the sell button, but we think that long-term-oriented folks should consider the following:

The China Mobile partnership is just kicking into gear; mobile payment is a potential new growth opportunity and the entry into new product categories is likely coming by the end of the year.

Further, the balance sheet is in fantastic shape with $159 billion in cash, short- and long-term marketable securities, versus $17 billion in long-term debt, with net cash equal to $159 per share.

Apple continues to buy back and, actually, retire stock (6.8 million shares in the latest quarter), while the P/E ratio is less than 13 times (drops to nine if the cash is stripped out) and the dividend yield is 2.4%.

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