Full Disclosure Finance

By Andrew,

Recently I’ve been keeping a close watch on Apple (AAPL) as a potential stock purchase. Anyone who even moderately follows stocks knows what a phenomenal year Apple had in 2007. The stock was up over 130% and the company has been firing on all cylinders. However, share price has begun to slide in 2008 along with the weakness in the broader market. As of Tuesday January 22nd the stock was trading 25% off its highs from the end of 07, right around $155 per share. The company was set to report Q1 2008 earnings after the close on the 22nd. During the day on Tuesday I was giving some serious consideration to starting a small position in AAPL to try and capitalize on the quarterly earnings report. Apple has been knocking the cover off the ball when it comes to earnings and it was widely accepted that this time around wouldn’t be any different. My logic was that a solid earnings beat in a beaten down stock could result in a nice pop in the share price.

This logic may be accurate in an optimistic bull market, but in the craziness of the current market all common sense goes right out the window. The more I thought about the purchase the more I realized that the risk/reward ratio is skewed way to far to the risk side of the equation. Investors are so incredibly skittish right now that any slight miss, any hint of bad news could sent the stock tumbling. I had no worries that Apple would kill earnings, but they are notorious for the classic UPOD (Under Promise Over Deliver), meaning that they are very conservative when it comes to their future earnings estimates but always come in way above what they forecast. In the end I stayed on the sidelines and boy I am glad that I did.

As expected Apple crushed earnings. For 1Q 2008 the company earned $1.76 per share on revenue of $9.6 billion compared to $1.14 per share on $7.12 billion in sales during the same period a year ago (54% increase in earnings). The results topped consensus estimates of $1.62 per share on revenue of $9.47 billion. However, 2Q estimates came in lower than Wall Street was expecting (UPOD) and iPod sales were also slightly disappointing (22.1 million units compared to forecasts of 25 million). Even though everyone knows that Apple is known for low-balling earnings estimates and the expectations on iPod sales may have been too high in the first place, the news was enough to send AAPL shares on a free-fall. The stock was down as much as 18% on the day. It recovered somewhat during the afternoon but still closed down more than 10%.

So does this mean that the growth story is over at Apple? Some people argue that the worldwide market for MP3 players may be reaching saturation. In my opinion those people are missing the big picture. iPod sales are only part of the overall story. Mac shipments rose 45% over a year ago representing 3x the growth rate of overall PC shipments, and iPhone sales came in at 2.3 million units in the last three months of 2007. The iPod has a halo effect, meaning that you buy it first and then gravitate towards their other, more expensive products. Apple is just wetting their feet when it comes to market share for personal computers and smartphones and their potential in these areas is huge. They are constantly ahead of the curve in terms innovation and bringing to market products that create massive consumer demand.

The stock is now 30% off its highs and, in my opinion, is begging to be bought. Depending on the price action in the next couple of days I will be looking to put on a position. What I wanted to get across in this post is, you don’t always have to jump to action right away. When pessimism reigns supreme sometimes the best course of action is to stay on the sidelines. You may miss a few opportunities but you might miss even more beatings. Logic doesn’t always prevail during the madness. Stay tuned.