For several weeks, Apple (AAPL 2.03%) has been flirting with the psychologically important $500 per share level, never dipping below it, but never leaving it too far from striking distance. As the U.S. economy prepares for life after the fiscal cliff, and the U.S. government is set to run out of money on Dec. 31, it seems natural to wonder if the company that recently became the largest in the world by market capitalization is a bargain at current levels -- or a cautionary tale of things to come. While the evidence against Apple seems to be mounting, I would argue that the stock's appeal is, in fact, higher than it has been in months.
Recent analyst opinions paint a mixed picture of the stock, but a closer look at additional downward pressures should reveal a clearer picture. While there are some negatives, if you cut through all the minutiae, what remains is the same solid company that everyone loved a few months ago. While I would not recommend being contrarian for contrariness' sake, in Apple's case, pulling away for the momentum-following flock is definitely worthy of consideration. Why? Apple is a steal at $500.
The analysts
A few weeks ago, UBS analyst Steven Milunovich dropped his price target on the stock from $780 to $700, precipitating a healthy sell-off. The Wall Street Journal reported on the action and its impact:
UBS slashed its 2013 earnings estimate and price target amid concerns about slowing growth and supply chain issues. UBS analyst Steven Milunovich cited some of the firm's Chinese sources who are skeptical that the iPhone 5 will do as well as the iPhone 4s. He also notes the iPad Mini could be cannibalizing the larger iPad.
The same day, Jefferies analyst Peter Misek cut his sales estimates for the iPhone from 52 million to 48 million in the first quarter of 2013. Mr. Misek pointed to reduced orders to many of Apple's key suppliers as a primary catalyst for his lowered projections. On the flip side, noted Piper Jaffray analyst (and Apple bull) Gene Munster stuck to his $900 price target, citing strong fundamentals. Essentially, there seems to be a bit of a divergence between analyst opinions, but many have turned negative recently.
Other factors
There are several other factors that have been cited in different circles as contributing to the decline in Apple shares. Two of particular note are the potential for higher capital gains taxes in 2013 and increased pressure on the stock from short-sellers. There are other factors, of course, but these two have immediate importance.
From a tax perspective, if we go over the fiscal cliff, there will be a significant increase in the capital gains tax rate for all taxpayers. This means that investors with long-term capital gains in Apple stock have a significant incentive to realize those gains before the end of 2012. Furthermore, because the wash-sale rule only applies to losses, if you own Apple shares and are carrying a gain, you are not prevented from repurchasing the shares immediately. You might remember that you must remain out of a stock for at least 30 days in order to count a tax loss against income -- otherwise the sale is a "wash" and your cost basis remains. This does not apply to gains, so given the potential risk of higher taxes, you have a real incentive to sell Apple shares with a gain this year, even if only momentarily.
The second factor putting downward pressure on shares is the shorts. As fellow Fool Evan Niu writes, "Since the end of August, Apple's short interest has increased dramatically from roughly 13.6 million shares held short to over 21.6 million shares held short at one point in November. That's an increase in bearish sentiment of 59% over 2.5 months." This obviously puts selling pressure on shares and has the potential to become a self-fulfilling prophecy right up until the floodgates open and a short-squeeze pushes shares rapidly higher.
Behind the trends
While these factors have certainly led to the downward pressure of Apple shares, the tax issue is on the cusp of irrelevance and the short issue can change quickly. Once the new tax year begins, there will no longer be an advantage to dumping shares. Even if the fiscal cliff issue has not been resolved, you will have all year to reassess your tax position. As I noted above, shorts tend to clear out quickly when a reversal occurs, creating a short-squeeze that can quickly drives shares higher.
When you sift through all of these external factors, Apple continues to look very strong fundamentally. With a 2.1% dividend yield, Apple still carries a P/E of 11.7. This compares favorably to Google at 22.1; Hewlett-Packard, which that failed to turn a profit; and even to Amazon, which has a P/E approaching 3,000. While it is hard to imagine a perfect comparison for Apple, these three competitors should be concerned about Apple at current levels; the shares are priced to perform and the company will benefit when the eventual reversal occurs. Ultimately, Apple shares are very attractive at current levels and should be considered a buy.
