Apple 2.0

Covering the business that Steve Jobs built

The Apple slingshot is primed

April 16, 2011: 2:20 PM ET

The pullback in advance of the company's Q2 earnings report has gone far enough

"If you can keep a good stock down, then you are able to load up for the ride back up. It's like a slingshot -- the harder you pull, the more propulsion you generate."

That's how Jason Schwarz, an author and investment adviser, described the game that hedge funds play with Apple (AAPL) in an article entitled "Apple: Seven Reasons Shorts Love It," -- a Dec. 2009 piece we liked enough to feature the next day.

One of the points he made then is worth remembering now, with the stock hovering near a three month low and the company expected to report record second fiscal quarter earnings on Wednesday:

Apple always bounces back. Over the long run, Apple fundamentals will certainly take the stock higher, but hedge funds want to maximize the ride. Keeping a great stock down allows them to profit from quick predetermined trades rather than being fully invested all the time.

Any Apple investor who's been paying attention can list the reasons being trotted out for the stock's dismal performance since late March: the Japanese tsunami and supply chain concerns, the iPad 2 stockouts, the iPhone 5 "delay," the NASDAQ-100 rebalancing and the usual concerns about Steve Jobs' health.

But remember this: Apple's shares as of Friday had a trailing P/E of 18.27 -- 14.7 if you subtract out its nearly $60 billion in cash and marketable securities.

The average P/E of the NASDAQ-100 is 17, and how many of those companies are growing their earning at 70% to 80% a year?

We can't say for certain what Apple's shares will do next week. But we can report that the headline of the Apple note J.P Morgan's Mark Moskowitz sent to clients Friday was "The Pullback Is Overdone."

Also on Fortune.com:

[Follow Philip Elmer-DeWitt on Twitter @philiped]

Join the Conversation
About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

Email | @philiped | RSS
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.