Updated with Apple closing share price.
Investors dream about finding obvious disconnects. Widespread misunderstanding leads to huge opportunity. We have such a scenario developing with Apple. Although Apple is the most widely followed stock on Wall Street, it is clearly the most misunderstood.
The current perception among traders is that Apple is expensive because of its 150% rally off the March 2009 lows. Seriously, if I polled 1,000 traders, I believe that 95% of them would look at the 33 P/E ratio on their screens and tell me that they'd love to own Apple, but it is just too expensive. What they don't know, is that the 33 P/E is about to drop significantly and will set up the opportunity of 2010.Most of us have heard that Apple is about to implement a new accounting method that will allow them to account for iPhone sales immediately rather than spread the effect over a 24-month subscription period. A few analysts here and there have made an attempt to explain the implications of this change but most simply ignore it. Why? Because they don't understand the depth of its impact. I'm going to simplify the explanation so everyone can understand. On my first day in college, I'll never forget my Accounting 101 professor (Norm Nemrow) tell me that the P/E ratio is the single most important number in the world. This number can make investors very rich if interpreted correctly.
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