"The time to buy is when there's blood on the streets." -- Baron Rothschild
The central philosophy of contrarian investing is founded on the belief that the worse things seem to be, the greater opportunity there is for profit. The trickiness of contrarian investing is deciphering Mr. Market's rationality from its irrationality. With Apple (NASDAQ:AAPL) down over 20% year-to-date and the Nasdaq Composite up around 15%, there is plenty of blood on the street, but underperformance alone doesn't qualify it as a contrarian candidate.
After Apple stock's prolific run above $700 a share and its market cap surpassing over half a trillion dollars, investors began expecting an absurd level of growth from a megacap company in exchange for the upward march to continue. When Apple failed to deliver growth as if it was a small-cap growth company, shares came back down to earth, and now trade at around an 89% discount to the market. You read that correctly: For Apple stock to trade at the current P/E of the S&P 500, it would have to appreciate by about 89%, assuming all else were equal.
Priced for zero
Despite the negativity baked into the price of Apple stock, analysts still believe that Apple's earnings growth will outpace the S&P 500 by more than double over the next five years. In other words, the Street ultimately believes that Apple will overcome its short-term margin pressures, resulting from product cannibalization. As Apple moves down market with lower priced devices such as the iPad Mini and the rumored "cheap" iPhone, it's doing so in hopes of growing its market share. The more Apple existing Apple users there are, the more potential halos the company could create around its products, which may lead to subsequent iPurchases.
Additionally, Apple's massive $50 billion increase in its share repurchase program will allow it to reduce shares outstanding by nearly 13% at current prices and could be accretive to earnings-per-share growth, assuming the company can maintain its current profitability.
A contrarian's dream?
There's been a lot of doubt regarding Apple's future trajectory and whether the company has any more "game changers" in store. Although game changers are great catalysts to get investors excited about in the short term, fundamentals are what will drive Apple's stock performance over the long term. As long as Apple can grow its market share as it moves down market, and also deliver steady earnings growth over the next five years, it doesn't necessarily need to be "exciting" for patient investors to make money.
The deep discount may scare some investors into thinking Apple stock is low-quality. I wouldn't let the price tag fool you.
Fool contributor Steve Heller owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.