{"id":1747,"date":"2013-05-01T10:34:47","date_gmt":"2013-05-01T17:34:47","guid":{"rendered":"http:\/\/financegourmet.com\/blog\/?p=1747"},"modified":"2013-05-01T10:34:47","modified_gmt":"2013-05-01T17:34:47","slug":"buy-apple-stock-time","status":"publish","type":"post","link":"https:\/\/financegourmet.com\/blog\/investing\/buy-apple-stock-time\/","title":{"rendered":"What Is Going On with Apple Stock?"},"content":{"rendered":"

There has been a lot of news about Apple stock lately. From the company’s swoon from an Apple stock price in the 700s down to the 400s in just months, to the company’s recent earnings report, to the new Apple plan to issue debt to pay shareholders dividends and buyback stocks. Is this good news for Apple? Is Apple stock<\/a> a good investment now, or is this all a prelude to a big Apple stock price crash?<\/p>\n

What’s Wrong with Apple Stock?<\/h2>\n

Years ago when I was a financial planner<\/a> in Denver, I advised a lot of people who worked at Qwest. For those of you who don’t remember how the internet bubble worked, it went a little something like this. First, people decided that the internet was an amazing new technology. They weren’t wrong. Then, they decided that every company that had ANYTHING to do with the internet was therefore a great investment. This was very wrong.<\/p>\n

Qwest provided a certain kind of telecommunications link that was very important to the internet. It used its stock to buy a “real” company with real earnings, namely US West before the whole internet bubble blew up. During the good ride, it would later turn out, the company engaged in earnings manipulation and the CEO was eventually accused of fraud. However, before the bubble burst, the company’s stock surged to previously unknown heights. When the truth came out, the stock plunged.<\/p>\n

Most employees held a lot of Qwest stock, and while they had a legitimate complaint about what happened to the company and its stock price, they all seemed to suffer from the misconception that the amount of money they lost should be measured from the peak stock price. The reality is that the stock never should have been that high in the first place. But for the accounting fraud, the stock peak would have been much lower. In other words, that top price was never a real price in the first place.<\/p>\n

Apple Stock Goes Up Too Fast<\/h3>\n

This brings us to Apple stock. At the start of 2012, Apple stock closed at $411.23. Just three months later, the stock was trading in the $600+ range. It peaked at $636 on April 9th. Just five months later, the stock hit $702. In other words, the stock gained around 70 percent in just eight months.<\/p>\n

\"apple<\/a>Why?<\/p>\n

What changed so dramatically that a large U.S. technology company was worth 70% more than it was just seven months earlier? What business conditions improved so greatly that in less than a year, Apple was worth $200 billion more than it was at the beginning of the year?<\/p>\n

In a word, nothing.<\/p>\n

While Apple did release a new iPhone, and it did enter new markets, and it did have good earnings, nothing changed so fundamentally that the company was obviously worth almost double what it had been to start the year.<\/p>\n

Apple stock never should have traded at $700. That price, that quickly, represented a euphoria among investors that wasn’t necessarily supported by the fundamentals. That isn’t to say that Apple stock won’t trade at $700 again, it most likely will. It is true that it went too high, too fast. In other words, it isn’t really reasonable to ask what is wrong with Apple stock that made it fall from $700 to $400. Or, to put it another way, the same thing that made Apple rise from $400 to $700 made it fall from $700 to $400, nothing.<\/p>\n

As is often the case with a stock that soars too quickly, there tends to be an over-correction on the other side.<\/p>\n

So, just how far down is Apple stock since the beginning of 2012?<\/p>\n

Actually, it is up.<\/p>\n

Among all the doom and gloom, and investors and analysts\u00a0jockeying to tell everyone what is wrong with Apple, the truth is that Apple stock is actually up. Shorter-term investors are obviously underwater on their positions. However, for those that intend to hold the stock long-term, this is nothing more than a dip. Short-term investors and traders, however, have been dealt a serious blow for jumping in during an unsupported ramp up in the stock price.<\/p>\n

Why Is Apple Borrowing Money?<\/h3>\n

As a business, it is hard to imagine a company doing much better. Apple generates so much revenue, and achieves so much profit on that revenue that it has too much cash. On the one hand, having too much money is a nice problem to have. On the other hand, neither Apple, nor its investors benefits much from having a bunch of money sitting around earning one percent. As is the norm for companies that generate steady, ongoing profits, without the need to reinvest all of those profits, Apple is returning capital to shareholders.<\/p>\n

Apple announced a higher dividend and a share buyback. I’m not a huge fan of share buybacks, especially when a company constantly buys back shares rather than paying a higher dividend<\/a> like IBM does. However, in this case, it makes some sense, especially since it comes with a higher dividend.<\/p>\n

The catch is that while Apple has over $140 billion in cash, much of that cash is held overseas. The way corporate taxes work, any money that Apple earns outside of the United States is not subject to US taxes until the money brought into the country. Apple doesn’t want to pay the taxes on that money to bring it back into the U.S. However,\u00a0it could if it wanted to<\/em> which makes that enormous cash pile a sort of collateral. And, cash makes the best collateral.<\/p>\n

So, Apple will sell a bunch of bonds and use the proceeds from those bond sales to pay the dividends and buy back shares. The interest rates will be very low both because of the low rate environment we are in, and all of that cash that the company can use to pay off bondholders if things ever got really bad.<\/p>\n

The company can easily pay the interest on those bonds from its current cash flow. Doing this both stops investors from constantly worrying about what the company will do with all of its cash, while at the same time giving it something to do with some of the future cash it earns (pay the interest).<\/p>\n

Is Now A Good Time to Invest in Apple Stock?<\/h2>\n

With these latest\u00a0announcements, Apple stock is paying a nearly 3 percent dividend. That puts it on par with many value stocks. For some investors, this is the kiss of death, suggesting that Apple is no longer a growth stock. If you are looking to invest in Apple as a high-flying growth short-term growth stock, that time may have passed. However, the company has enormous profits, and owns an enviable position among US technology companies. Not a single financial measure depicts a company in trouble.<\/p>\n

So, is now a good time to buy Apple?<\/p>\n

If you want to own a US technology company, you could do a lot worse than to let Apple pay you 3 percent while you wait for the company’s next blockbuster product to push up the stock price, or even for investors to\u00a0gradually\u00a0<\/em>decide that even a 10 P\/E is the right price for the stock.<\/p>\n

 <\/p>\n

As always, this article is for informational purposes only. This is not an offer to buy or sell securities. This not a recommendation to buy or sell Apple or any other stock. Consult your tax professional and financial professional for information specific to your situation.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

There has been a lot of news about Apple stock lately. From the company’s swoon from an Apple stock price in the 700s down to the 400s in just months, to the company’s recent earnings report, to the new Apple plan to issue debt to pay shareholders dividends and buyback stocks. Is this good news for Apple? Is Apple stock a good investment now, or is this all a prelude to a big Apple stock price crash? What’s Wrong with Apple Stock? Years ago when I was a financial planner in Denver, I advised a lot of people who worked at Qwest. For those of you who don’t remember how the internet bubble worked, it went a little something like this. First, people decided that the internet was an amazing new technology. They weren’t wrong. Then, they decided that every company that had ANYTHING to do with the internet was therefore a great investment. This was very wrong. Qwest provided a certain kind of telecommunications link that was very important to the internet. It used its stock to buy a “real” company with real earnings, namely US West before the whole internet bubble blew up. During the good ride, it … <\/p>\n

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