Apple Surges 7% -- Is the Rally Built to Last?

Apple  (Nasdaq: AAPL  ) closed out the day up the day an impressive 7.2%, far outpacing the broader Nasdaq's 2% gains. Put in more impressive terms, the company added $35 billion to its market value in a day. This all coming on a day where there was little news about Apple itself. 

Instead, the focus shifted to broader economic concerns. Splashed front and center of almost every financial news site was talk of building optimism surrounding U.S. budget talks. Investors have come to fear the dreaded "fiscal cliff," in which spending cuts and tax increases kick in at the end of the year unless politicians can reach a compromise. Seeing why the fiscal cliff would be a major hit to companies is fairly obvious: Increased taxes will drain spending power for discretionary items like iPads and iPhones. Not only that, but the cumulative effects of those tax cuts and government spending cuts is projected to turn U.S. economic growth negative. 

Fears over the fiscal cliff have been a central component in the market's recent sell-off. With Apple having seen its own shares tumble about 25% since Sept. 21 -- far outpacing the Nasdaq's 10% loss -- today's market rally presented quite the one-day rebound. When markets turn after a sharp sell-off, the most beaten-down companies generally see the biggest gains. Should Apple investors celebrate today's gains, or keep a wary eye to continuing fiscal cliff worries? Let's take a deeper look. 

We've seen this rodeo before
The stand-off over the U.S. budget isn't a new situation. You may recall the gamesmanship played over raising the debt ceiling during the summer of 2011. That showdown led the S&P 500 to fall 17% in less than a month. Tech stocks were badly beaten down during the sell-off, with most the selling centered on tech companies levered to IT spending. As company executives pulled back spending targets in the face of uncertainty, IT budgets were the first to be cut back. That led big-name IT companies like Cisco to issue strikingly negative guidance. 

However, at the time, Apple largely avoided the steep market plunge. Its share price dipped far less than the general market in large part because -- in stark contrast with other tech stocks -- its own earnings during the debt standoff surpassed all expectations. Apple posted earnings of $7.79 on July 19, 2011, far surpassing Wall Street's expectations of $5.83 per share. While tech stocks around it imploded, Apple's bread and butter of consumer spending was still firing on all cylinders. Not only that, but it had the aura of invincibility around it, having posted its most impressive earnings thumping to date. 

Is this time different?
Flash forward to the fiscal-cliff standoff today, and much remains the same. Big IT companies are issuing worrying guidance as budgets look insecure. That's led to a selloff across technology. 

Yet this time, instead of coming off thumping earnings, Apple has instead missed earnings expectations in three of the past five quarters. Not only that, but as the company expands, it's more directly in the crosshairs of budget talks. While most of Apple's sales are still to consumers, its sales growth in businesses has been impressive in the past year. Between iPads finding buyers across almost every Fortune 500 company and the iPhone replacing Research In Motion  (Nasdaq: RIMM  ) BlackBerrys in businesses and government agencies, Apple has seen its exposure increased to areas that would be most affected if the fiscal cliff isn't resolved. 

Not only that, but a U.S. slide back into a recession would have a very negative impact on the struggling global economy. A weak U.S. economy not only would put further strain on Europe as the continent works on its own debt woes, but the follow-on effect would be that developing countries like China would see even more pressure on their own sliding growth rates. Apple now sees 15% of its sales into Greater China and continues seeing phenomenal growth in the country. That's growth central to Apple's continuing gains in the coming years, but also growth that's endangered 

Beyond doom and gloom
There are pretty good reasons for not only Apple investors, but tech investors in general to be worried about the fiscal cliff and its near-term effects. While markets rallied today, the optimism largely came from comments from lawmakers stating their confidence that a deal will be finished before the end of the year. There's a large gap between the mere optimism over a deal and, you know, actually finding compromise and getting one done. 

This is by no means saying Apple is a bad investment. On the bright side, we saw a similar standoff that was averted last summer. Beyond that, Apple rallied hard today in part because there's little optimism priced into its shares. The company trades below general market P/E levels in spite of continued growth opportunities in both smartphones and tablets. Even if the fiscal cliff becomes a reality, Apple's huge  $120 billion war chest allows the company to continue investing while competitors wouldn't have much flexibility. 

However, it is a reminder to investors focused on the day-to-day ups and downs of Apple that rallies on political news are often short-lived and quickly reversed. If you think Apple's recent slide will be averted by a single day of "positive comments," remember that political standoffs are rarely resolved in a smooth fashion. 

Ignore the day-to-day noise of investing
Even with Apple at the center of technology's largest revolution ever, as the recent ups and downs in the company's share price show, there is a debate raging as to whether Apple remains a buy. I'm prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 19, 2012, at 7:43 PM, HiramWalker wrote:

    Samsung has failed to innovate for many years and are doing fine.

  • Report this Comment On November 19, 2012, at 8:07 PM, Arthur1111 wrote:

    Apple's rally will not last. What happened today was a mini correction for a stock that plunged over 25% from its high.

    The real issue with Apple is lack of innovation. They have not done much over the last 2 years. The situation will get worse next year with stiff competition from BB10.

    The future is on RIMM's side. Sell AAPL and buy RIMM before it is too late.

  • Report this Comment On November 20, 2012, at 7:58 AM, PaulDEJ wrote:

    Cant agree more with you Arthur111. The future belongs to RIM. Come January the so called 'vapourware' will become a reality and crapple fans across the worlds worst nightmare will become a reality. BB10 together with Android will start sinking the one dimensional, non innovating, leaderless, stale crapple. RIM will show the most powerful mobile system to the world and crapple will still be stuck with ios 6. What a joke they will be with the oldest os in the market from 2007.

  • Report this Comment On November 20, 2012, at 9:07 AM, SaraW946 wrote:

    Here is what I see in Apple's performance:

    1) The stock dropped about 14-15% which has happened before. As a matter of fact, due to extreme optimism, mostly by inexperienced/amateur investors, the stock rose too high before the release of iPhone 5. That combined with the usual naysayers after the launch of all Apple products (which I had predicted and posted about on TMF), some extreme lamentations about Jobs's demise, and the FoxConn issues, caused the whole drop which is by no means the worst in Apple's history.

    2) Due to political and economic uncertainties, including the American Elections, which are not always factors when stocks drop, Nasdaq fell by about 10%.

    3) No company can grow by leaps and bounds all the time. Not even Apple. Regarding the famous analyst expectations that were missed, it is a well-known fact that numbers are generally cooked, there are good reports on how in this case, plus these are special times. Apple does not exist in a vacuum.

    4) The stuff about lack of innovation by some readers suggest that they either write inaccurate reports on purpose, or they clearly don't know what they're talking about, plus they don't even know how to interpret Apple's products.

    5) I am dismayed at the fact that Apple naysayers always focus on the tree and miss the forest. Why, oh why don't they look at other companies as well? And no, Apple is not unique, therefore it should behave like an alien stock. There are general principles that govern the stock market. Last, but not least, even more famous Apple naysayers seem to buying its stock when they judged (correctly) that it had fallen low enough for them to buy. They obviously expect to make a profit from it and not a small one.

    6) Anyone who's dreaming of the Apple stock hitting $1,000 anytime soon and is fuming when it does not, does exactly that: dreaming. :)

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