Apple Inc (AAPL)-A Look into Expectations

01/20/2009 12:01 am EST

Focus: STOCKS

Nick Perry

Equity Options Trader, Schaeffer's Investment Research

Reuters posted an interesting article on Apple Inc (AAPL) recently. It presented both the bullish case and the bearish case in light of the latest news about Steve Jobs.

The case for the stock could generally be summed up under the heading of compelling valuation and fundamentals. The case against the shares focuses on the uncertainty, a potential lack of leadership, and concerns about the economy. I would like to add another element to the discussion-expectations.

In a post last month, we saw how the Street had become steadily more infatuated with the shares from 2003 through 2006. Since then, the vast majority of analysts have remained in the bull camp, though we have seen opinion soften recently. According to Zacks, 15 of 23 analysts (65%) now rank the stock with a "buy" rating. A few months ago, more than 80% of the ratings were buys.

As a contrarian, I usually view overt bullishness from analysts as a warning sign. That may sound like an inflammatory or even arrogant comment, but let me explain. While there have been studies that delve into the accuracy of ratings, my view is more general. It is merely a way to help gauge sentiment and potential buying demand. If everyone already loves a stock, that means a steady stream of new money will need to enter the stock to fuel a rally.

A point I have argued for a long time is that Apple is a different type of stock. It is the premier member of a small group that I refer to as "story stocks." In my opinion, Apple has been unrivaled in its ability to generate buzz. As long as that buzz machine is running, pulling in new buying demand to boost the shares isn't an issue.

I think the optimism is where the real risk lies with the stock. Can the company still continue to generate the excitement that keeps the bulls interested? The shares are down nearly 50% over the last year and are flirting with their annual low. I suspect that has some of the bulls questioning their stance. According to the company's investor relations page, Apple will be reporting earnings on January 21. That should give us a good look at the company's ability to keep the buzz machine running.

By Nick Perry of Schaeffer's Trading Floor Blog

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