Why Apple's Lower Price Tag Spells Bigger Gains in 2014

BALTIMORE (Stockpickr) -- Following the 7-to-1 stock split that went into effect on Monday, $94 Apple (AAPL) is leaps and bounds better than $658 Apple.

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I realize how stupid that sounds to anyone who knows the first thing about how stocks work. But bear with me.

Sure, Apple's split effectively boils down to an accounting maneuver. If you owned $1,000 worth of Apple stock on Friday, you still own the same $1,000 or so of shares (give or take a couple of days' market fluctuations) -- but your stake is now cut up into smaller individual pieces. Any first-year finance undergrad could tell you that a stock split doesn't make a real impact on where Apple's headed from here.

But they'd be dead wrong.

Instead, post-split Apple is far better-positioned to drive home meaningful gains than its triple-digit predecessor. And today, I'm going to show you why.

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Before we get into it, I should give you my standard disclaimer: I own the stock. I'm not an "unbiased" journalist. I'm an investment professional, and I'm talking my book, just like I have before. But that doesn't make anything I'm about to say any less true.

I remember back in college, on the first day of Economics 101, my professor wrote a set of basic economic assumptions on the board. The first was that "market participants are rational." Ugh.

Investors aren't rational. We're often far from it, in fact. Market inefficiencies are everywhere. That's why shares of a bankrupt home theater company called TWTR Inc. gained 1500% the day Twitter's (TWTR) ticker symbol got filed. Oops. It's also why the value of the S&P 500 made a nearly 62% round-trip run between cratering in 2008 and bouncing back in 2009.

These aren't rare occurrences. As Warren Buffett once said,"If markets were rational, I'd be waiting tables for a living."

Anyone who thinks that stock splits don't matter has never had a client throw a fit because a stock price was "too expensive." Yes, it happens. And that's precisely what makes Apple's split so genius.

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According to Apple itself, the reason for the split was to make AAPL "more accessible to a larger number of investors." Hogwash. The real reason was to knock down a psychological stumbling block for a share price that's been having difficulty sustaining momentum in spite of a valuation that's dirt cheap compared with others today.

In doing so, the firm basically indexed its new share price to the $700 high-water mark that shares hit back in September 2012. As I write, a mere $5.75 is all that stands in the way between Apple's current price and all-time split-adjusted highs.

It doesn't sound like much, does it?

That may all be anecdotal, but the data back it up too. According to a study by David Ikenberry at the University of Colorado (referenced by Mark Hulbert in a recent column), a stock outperforms the market by an average of 7.9% in the year following the announcement of its split and by an average of 12.2% in the three years following the announcement.

Apple is particularly predisposed to doing well after this week's split. After all, few names can incite emotion (both positive and negative) the way that Apple can. There are plenty of people who love or hate this stock (and the company's products, for that matter) at any price -- and that creates a stock split situation that's primed for a big momentum run.

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More important, Apple has the fundamental numbers to back it up. As I write, almost 24% of Apple's market capitalization is paid for by cash and investments on its balance sheet. That's enough to give Apple an ex-cash P/E ratio of just under 12. In other words, Apple trades for practically half the earnings multiple you'd pay for the average Nasdaq 100 stock today.

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Oh yes, and what about the iWatch? It seems you can't talk about shares of Apple today without mentioning it. A quick Google news search reveals more than 198,000 media mentions of the unannounced Apple product in the last few weeks, with analysts at UBS forecasting that Apple could move 21 million units in 2015 at a $300 price point.

Heh, yeah, and Tim Cook will be wearing orange stocks when he gives the presentation.

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The fact is that I don't know diddly-squat about Apple's future product line. I don't go through Jony Ive's trash in hopes of finding sketches on discarded napkins. The beauty of the situation in Apple is that a triple-digit share price in AAPL isn't contingent on some yet-unseen "next big thing." Instead, Apple is still a bargain-priced stock even if it never grows again. If it merely keeps pace with its current numbers, it will earn enough profits to cash out every investor in just seven years. That's ludicrous.

And no other comparable tech mega-cap shoulders the same discount that Apple currently does. Meanwhile, Apple is making leaps and bounds at a strategy that could amplify the firm's growth in the years ahead, and a stock split in AAPL clears the way for new all-time highs in 2014.

Tim Cook has said publicly that the firm is working on groundbreaking new products that will see the light of day later this year. Even if those new offerings are modest successes, Apple will justify a dramatically larger price tag than it does today.

Luckily for the more emotionally driven investors, it will be a smaller "price tag" than shares sported just last week.

-- Written by Jonas Elmerraji in Baltimore.


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At the time of publication, author was long AAPL. Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji

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