Five Reasons Why Apple Is Not To Buy
Tue, Apr 3, 2012
Why Not To Like Apple Products
Apple (NASDAQ:AAPL) is the king of the market.
Its shares’ steady increase in price has created an equally cult-like following among investors.
And now, with a few big recent announcements of dividends and a share buyback program, the number one question on Wall Street is Apple, at $600 a share, still a buy?
We understand the rationale. Apple’s a great company. It’s huge and is still growing steadily. Its customers love it. Analysts love it more. Yet it’s forward P/E ratio is about 12…and on and on.
But there are Five Clear Reasons To Not To Buy Apple Now
1. Analyst Estimates – The estimates for Apple’s earnings next year have soared. Consensus estimates expect Apple to earn $50.02 per share next year. Just three months ago the estimate was $38.84 per share.
That’s an increase of more than 28% in the past few months. Wall Street and the herd love it. You should not.
Past analysis of earnings estimates shows the time to buy is when analysts are Downgrading A Stock. Not when they’re upgrading and the herd is piling in.
2. Analyst Ratings– There are 55 Wall Street analysts covering Apple. Their disastrous record aside, it’s easy to see there aren’t any surprises with that many eyeballs watching the stock.
Those analysts are also extremely bullish. 24 of them have “Strong Buy” ratings on Apple and 23 have “Buy” ratings. Only seven of them, or about 13% of analysts covering Apple, have a “Hold” or below on the stock.
With so many “buys,” who’s left to buy the Apple’s shares?
3. The Truth about Share Buybacks – Wall Street was very excited about a $10 billion share buyback program.
On the plus side, a share buyback program provides another buyer of shares at any price.
On the negative side, companies tend to buy back shares at the worst possible time.
Companies venture share buybacks when times are good, they’re flush with cash, and their shares are high. They are not contrarian investors.
4. Apple TV – most of Wall Street expects Apple to jump into the TV market.
On the surface, the move makes sense. The TV market is much bigger than the iPad, cell phone, and computer markets. However, Apple’s model of providing a top-quality product will not likely be a success in the TV market.
Why? It’s simple. The TV market is very mature. There is and has been very little market for high-end TVs. It’s one of the most price-sensitive markets in the consumer segment.
As a result, Apple could win big market share, but sacrifice profit margins. Or it could charge high prices and miss out on the volume that has made the iPad, iPod, and iPhone so extremely.
5. Steady Dividends – Apple announced its first ever dividend a few weeks ago.
The quarterly payment $2.65 a share won’t put too big of a dent in the company’s nearly $100 billion cash hoard. It does, however, signify something much worse.
Apple is running out of growth opportunities.
The New York Times disagrees. The Old Gray Lady says Apple “has not yet reached that level of maturity.”
There are still so many questions surrounding Apple. The main concern a contrarian investor would have is, “who’s left to buy?”
We’re big believers of the old adage, “Is everyone in? Let the pain begin.”
Apple’s a great company, but it’s anything but a great buy at this time. The best contrarian bets are in utilities and other out-of-favor sectors with high levels of current income and lower valuations.
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