A few days ago I wrote an article about Apple bottoming. You can read Stealing Apples While Others Panic to better understand the bottoming process. The quick answer is that investors lose their desire to accept the current price and dig their heels in.
Another common name for investors' unwillingness to sell is "strong hands," and that's where Apple is right now. The bulk of investors are not willing to sell because they don't have a better place to put their money.
The most common question I'm receiving now concerns Apple's upcoming earnings release. I understand the enthusiasm (some may call it worry), but I caution long-term investors not to get too caught up over one quarter. It's not healthy from a mental or financial point of view.
Shrinking margins have become the Wicked Witch of the West, and lower purchase orders by Apple appear to be a Wicked Witch of the East. (Was there a Wicked Witch of the East? I don't know, but you get the point). Both of these issues may help sell newspapers and help some in the media look smart, but you will overvalue both of the metrics at your own financial peril. Here's why. Apple's margins are massive by any standard. After adjusting for the largest reasonable cuts to gross and net margins, Apple still maintains a lead in margins that competitors Nokia (NOK), Research In Motion (RIMM), Microsoft (MSFT), and Sirius XM Radio (SIRI) would love to enjoy. My estimated forward looking operating margins: Apple: Minimum of 30%-33%, but I believe 33-36% is more likely. Nokia: 1%-2% estimated best case, although they may not have any. RIM: 3%-6% estimated best case, but 0%-3% is more likely. MSFT: 28%-32% Sirius: 25%-26%
We can add in Intel (INTC), DELL (DELL), and IBM (IBM), and the song remains the same. A drop in margins still leaves Apple as the one to take home. Net margins largely follow the same pattern on a relative basis. Dollar for dollar invested, investors can expect a greater return on investment with Apple than most any other technology company. The price-to-earnings ratio is pricing in zero growth. No one is reasonably suggesting that Apple will not at least have the second best quarter ever if they don't report the best in both revenue and earnings.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV