This column originally appeared on Real Money Pro at 11:26 a.m. EST on Feb. 6.


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(AAPL) - Get Report

share price has done a 180-degree move since the beginning of 2012.

The shares are down from $700 a share to $430 a share based on a confluence of sentiment, supply/demand, technical and fundamental factors:

  • The Apple shareholder base turned out to be more transitory and more relative-price-driven than many thought.
  • As the stock turned lower, there turned out to be more renters than owners.
  • As the stock turned even lower, fund flows turned dramatically.
  • Stated simply, Apple's share price morphed from the NBA (nothing but Apple) market to the ABA (anything but Apple) market.
  • All the while, the competitive landscape was eroding -- my bear case in September 2012 centered on this argument.
  • At first, the second-quarter 2012 earnings miss (which was an outgrowth of greater competition) was ignored because the relative and absolute share price action was so strong.
  • As investors refocused on fundamentals, however, the stock price dropped to the current levels (reality bites).
  • Predictably, previously bullish Wall Street analysts have turned negative on the shares.

With an extreme move in investor sentiment, shares of Apple are turning more attractive on a risk/reward basis, though they probably still should be viewed as

a trading sardine not an eating (or investing) sardine


I still believe that most earnings forecasts for the company are too high (based on a more competitive business backdrop), but even if, as I fear, margins are vulnerable, this has likely been discounted at current price levels.

Despite the share price schmeissing,

Apple's stable of applications and products

will remain a dominant factor in the markets it serves.

Investors' disappointing reaction to the recent trends in the company's product offerings might be transitory as the company begins to upgrade its portfolio and continues to innovate.

Memories are short, and, in its impatience, Wall Street has quickly forgotten Apple's history of innovation.

Importantly, free cash flow generation will be high even at the lower profit levels that I am forecasting.

Finally, we are likely very close to a more generous return of capital decision by the company -- something for which Greenlight's David Einhorn has been advocating. (The company declared its initial dividend on March 19, 2012.)

The pushback I got in late September 2012, when I penned a cautionary column, is similar to the disbelief and pushback I am getting based on my long position today.

So it is in life and in investing.

Stated simply, I now feel the risk/reward for Apple's shares has turned more favorable.

At the time of publication, Kass and/or his funds were long AAPL, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.