Inside Wall Street: For Bargain Hunters, Apple's Shares Fit the Bill

What now, Dow Jones? After plunging below 10,000 in mid-afternoon yesterday, the blue-chip 30-stock market barometer rallied late in the session and cut its losses from 190 points to 22, closing at 10,043. What was a depressing turn of events for the bulls earlier in the day turned out to be heartening turnaround. The Dow may still face tough sledding.

But some gutsy investors have already started bargain hunting anyway for quality stocks that have been casualties during the plunge. Companies with clean balance sheets, sturdy earnings and dominance in their particular fields – and whose shares have needlessly been pounded – have been the top shopping choices of the bold and opportunistic long-haul investors.

Among companies that fit the bill is Apple (AAPL), whose stock has swooned from its 52-week high of $272.46 a share reached on Apr. 26, to $245 yesterday. The Dow's recent high of 11,205 also happened on Apr. 26.

Bullish on Apple

Apple is one of the few stocks in which Wall Street has been steadfast in its bullishness. Of the 47 major analysts who follow Apple, none recommend dumping the stock despite the market's broad and deep decline. Forty three analysts recommend buying the stock and four rate it a hold.

One analyst who has reiterated his strong buy recommendation is Clyde Montevirgen of Standard & Poor's, who says the stock is no doubt reflecting the market's bearish sentiment. But when investors start reevaluating stocks, "Apple's growth story will emerge and surely attract investors again." He notes that during the current meltdown, Apple has relatively outperformed the market by a wide margin.

In spite of the dreary market environment, several positive things are happening at Apple, says Montevirgen. He notes that Wal-Mart (WMT) is now offering iPhone.3GS at a low price of $97 each. Such price reductions, he notes, have usually been followed by the introduction of new models. "We believe this is another indication that Apple will soon unveil the next generation iPhone – most likely at its Worldwide Developers Conference on June 7."

He says Apple's "product refreshes are effective ways to strengthen its brand, generate demand, and aid margins." The growing buzz on its products and strong sales of the iPhone remind investors of the company's formidable growth story," asserts Montevirgen. For 2010, the analyst expects sales of iPhones to hit 40 million units, iPods 51 million, Mac computers 15 million, and iPads 4.5 million. Other analysts project higher numbers for the iPad.

There are reports that Apple will soon come out with iPhones suitable for customers of Verizon (VZ) and Sprint (S). "If Apple can team up with, say, Verizon on the iPhone, it will have the potential of doubling its iPhone sales in the U.S.," says Montevirgen.

iPhone at Verizon?

Would Verizon customers jump at the opportunity to switch to iPhone? Apple hasn't announced plans to sell the iPhone to non- AT&T (T) carriers in the U.S. But Verizon could add more than 7 million annual units, estimates Katy L. Huberty, analyst at Morgan Stanley. Some 17% of Verizon customers would upgrade to a Verizon iPhone, she figures. If launched, she assumes purchases will be spread over two years due to contract terms.

For all the hoopla about Apple's products, some argue that the company isn't fully understood. "We continue to believe investors underappreciate Apple's future growth opportunities," says Huberty. She notes that the iPhone continues to gain market share, and points out that demand for iPad has been better than expected. And investors haven't much appreciated Apple's investment for growth in China, either, she says.

Rating Apple overweight, Huberty has added Apple to Morgan Stanley's list of best ideas. The iPhone, says Huberty, "is the key driver for the $400 bull case" for Apple's stock. As of now, her 12-month target for the stock is $310 a share. She has raised her fiscal 2011 (ending Sept. 30) earnings estimate for Apple to $17.25 a share from $16.09.For fiscal 2010, she estimates earnings of $13.68. Apple earned $9.08 a share in fiscal 2009.

Apple Price Target: $400
The lofty $400 price target may not be too far off. Some analysts are already forecasting the stock hitting $350 a share in 12 months, One of them is Mike Abramsky of RBC Capital Markets, who says Apple's valuation remains "compelling." He sees the next leg of valuation being driven by iPad sales acceleration, iPhone's global market expansion plus PC share gains and other Apple innovations.

Indeed, Apple may be the stock to watch for the next few years. Value Line, which seldom gives a stock its top ranking, gives Apple its No. 1 rating for timeliness. "It is a good momentum platy," says Value Line analyst Justin Hellman. "We like Apple as a three-to-five-year holding," he says in a recent note to clients. For investors wishing to invest in a rising star, Apple surely fits the bill.
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