Here is Jensen’s follow-up from the March 17th article.
Looking pretty prescient from a week ago but we will see how April goes.
There are four basic types of investors; Growth, Value, Income and Momentum. For many years, Apple (AAPL) was a stock that appealed to all these investors with the exception of Income investors. Although its growth was phenomenal for years, its earnings multiple rarely got above the overall market especially if one considers its giant cash hoard. From the stock market bottom in March 2009 to its all-time in Mid-September, Apple was a stock that made all of its investors (growth, value, momentum) consistently happy. However, starting with its descent from over $700 a share in September all the way down to its recent low of $420 a share; Apple gradually lost its investor base. First, momentum investors started to bail when the stock moved under its 200 day moving average in early November. Then growth investors started to abandon the stock soon thereafter as concerns about declining gross margins and increasing competition from Samsung (SSNLF.PK) weighed on growth investors worried about falling earnings estimates. This left only the value investors to support Apple’s stock price.
It was a long, ugly ride from $705 a share down to $420 a share earlier this month. I recently penned an article on why I believe that $420 level was likely to be the bottom for Apple. Since then the stock has gained some 10% and is on its way to recapture more of the investors that recently abandon the shares. After underperforming for months, Apple beat the S&P substantially last week (see chart 1).
More importantly, AAPL crossed its 50 day moving average for the first time since October (see chart 2) Friday. This should start to recapture the momentum investors that dumped the shares late last year. The next momentum milestone will be around the $500 a share level where the current 100 day moving average currently hovers.
I think the stock could soon hit that important level as it is about to start to appeal to income investors. The company paid its first dividend in August of last year and the stock now yields 2.3%. A nice yield, but not the 3% dividend level that normally is necessary to attract income investors. However, that is about to change as a dividend hike is widely expected to be announced in the near future. Projections are all over the map including the possibility of a special dividend. Most expectations seem to be for a 50% to 100% increase with a recent poll of analysts by Bloomberg showing an average prediction calling for a 56% hike. This would put Apple’s dividend yield to over 3.5%. This is more than traditional dividend stocks like Procter & Gamble (PG) which yields 2.9% and sells at more than 17x forward earnings (Apple sells at just over 9x forward earnings in contrast, under 7x forward earnings subtracting cash).
By the time earnings come around again on April 23rd, Apple should be a core holding for value, income and momentum investors, which should bode well for continued upside on the beaten down shares. Getting the growth investors back on board might take an earnings report that does not show eroding gross margins. A bigger or cheaper iPhone, an iWatchor iTV announcement could also appeal to growth investors. I think having the momentum and income investors behind the stock could get the stock back to $560 a share (recovering roughly have the decline from $700 to $420 a share) but getting the stock back to its previous highs might require a successful launch of the new version of the iPhone 5 rumored for late summer. Still, a $100 a share increase in the shares until that happens should be enough to satisfy current shareholders in the meantime.