Stop the Apple Insanity!

NEW YORK (TheStreet) -- You make money in the market by going against its emotional tendencies.

We all understand irrational exuberance. Online grocery stores and liar loans were obvious signs of a crash coming in the late 1990s and mid-2000s.

But there is also irrational pessimism. The markets of 2001 and 2009 were great times for long-term investors.

This behavior can also infect individual stocks. Right now I'd say Amazon (AMZN) is going through an irrationally exuberant period. Great company, great growth story, but this is a retailer selling for two times its annual revenue, for which profit is anathema. As Paul Volcker once said to a woman asking for stock tips, "Prices will fluctuate."

Then there is the irrational pessimism currently surrounding Apple (AAPL). It's gotten so bad people aren't even talking about it anymore. A trailing earnings multiple of 11.71, minus its cash hoard, which Wired discussed recently, means you now have a technology stock that's cheaper than Gannett (GCI) on a cost-earnings basis. Oh, and the Apple dividend now yields 2%. That's half of Gannett's yield, but still.

Yet technical analysts at Investorplace predict a move down on Apple, to $480/share, maybe $460. What gives?

The bearish case is that Apple is a manufacturing company in a commodity business, and it doesn't fully control the supply chain. It designs, orders, ships and sells devices that others sell on razor-thin margins, so it's assumed Apple's margins will also, soon, get just as thin. Apple is drawing software margins on hardware, and folks figure it can't last.

Then there is the "what have you done for me lately" syndrome. The iPad is four years old, and the product category is maturing. There are continuing rumors of an "Apple TV" that the company keeps knocking down, but the reason those rumors keep appearing is that investors want a new story, they want to feel that Apple is about to up-end another industry as it did music, phones and PCs.

At its current market cap of nearly $500 billion, Apple represents about 10% of the Nasdaq's total valuation. If you're not long Apple, as they say, you're short it. The recent fall in Apple -- down nearly 19% in three months -- has thus had a disproportionate impact on many portfolios' performance, leading to a rush for the exits.

For Apple to reach a market average P/E of about 14.5, the shares would have to advance about $100 from here. The company now has 54 analysts, whose median earnings estimate for the year is $46/share, slightly higher than last year's $44.30. If the fourth-quarter substantially beat those estimates (and Apple has a habit of doing that), it could easily bring the stock's multiple more in line with that of the market. It is, in the near term, a screaming buy.

But Apple will never be the kind of stock it once was. It's just too big for that. You have to look at it based on metrics used for other large, industrial companies. Which means that when it's fully valued, when it gets about $620/share, you lighten up and wait for the next downdraft. Or, like me, you just ignore its fluctuations and know it's good for the long term.

At the time of publication, the author was long AAPL.

Follow @DanaBlankenhorn

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.