How Apple Stock Got its Groove Back

Apple (NASDAQ: AAPL  ) is winning back the naysayers. 

You may not be able to tell right away by eyeing the short interest on the consumer tech bellwether. The number of Apple shares sold short ballooned from 17.8 million at the end of October to 19.4 million as of mid-November. However, we're a far cry from the 41.6 million shares that were sold short as of the end of April.

The turnaround -- in sentiment, at least -- becomes more evident by eyeing an Apple stock chart. When the shares opened at $558 this morning, it was 45% ahead of where it was when it bottomed out in April. It's not a coincidence that Apple stock bottomed out around the same time. Bears tend to pile on when pessimism is at its thickest, and the iEverything company has mounted a comeback as more than half of the short positions in April have been covered.

The chart also shows that Apple is now just 4% away from hitting a new 52-week high on a dividend-adjusted basis. It's a welcome sight for investors, though we are still far removed from Apple's all-time high that was hit when Apple briefly crossed $700 the day that the iPhone 5 rolled out.

Apple went on to shed 45% of its value before bottoming out seven months later. Investors were concerned with slowing growth and contracting margins. The consumer giant hasn't exactly conquered those obstacles. Revenue growth has decelerated, with Apple's top line climbing just 4% in its latest quarter. The news has been even more problematic on the bottom line, where EPS has declined in all four quarters of fiscal 2013.

Every turnaround begins with the process of turning around
The good news is that things should start to get better. Analysts see revenue climbing 5% during the holiday quarter. That may not seem like much given the introduction of the iPhone 5s and iPhone 5c, as well as the expansion of its iPad line, but at least we're looking at accelerating growth again. Wall Street sees revenue growing nearly 8% higher for the entire fiscal year that ends next September. The news is also encouraging on the bottom line, where the pros see profitability per share climbing 1% during the holiday quarter. Yes, that's still contracting margins and helped out by Apple's aggressive share buybacks, but it would break that nasty streak of four consecutive quarters of declining earnings per share. Wall Street's eyeing 9% growth in earnings per share for all of fiscal 2014, so the margin picture should improve from here.

UBS analyst Steven Milunovich seems to be feeling more optimistic at least. He boosted his rating on Apple this morning, sending the stock higher. His price target is climbing from $540 to $650. One of his bullish contentions is that Apple is nearing a deal with China Mobile to finally start carrying the iPhone.

China's largest carrier -- the world's largest carrier, actually -- has been a holdout among China's biggest wireless service providers. Milunovich feels that having China Mobile on board could deliver 10 million annual iPhones. That would be incremental and substantial since Apple sold 150 million iPhones in fiscal 2013. 

That's not the only reason that Milunovich is bullish. He sees investors rotating back into Apple just on the perception that things will start to get better. Apple was never a broken company. The stock took a 45% hit in seven months after peaking, but it's not as if Apple's fundamentals decayed by that much. It was simply investors moving over to steadier tech giants that have gone on to disappoint investors in recent months. Those investments didn't pan out, so now it's back to the creature comforts of Apple with realistic expectations to guide the way from here.

It's Apple's turn now.

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9/28/2016 4:00 PM
AAPL $113.95 Up +0.86 +0.76%
Apple CAPS Rating: ****
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China Mobile CAPS Rating: ****