Apple reported an impressive quarter yet the stock sold off sharply after hours.  Fortunately we had lowered our position in the name a little before earnings came out as we were a little too overweight it.  As I have said many times before, Apple is a very cheap stock, a little cheaper today but a great value in a fully to over-valued market.  I expect the stock to rebound nicely in the coming months.  Here’s our thesis on owning Apple.

Apple is a cheap stock on fundamentals, selling at 16.03 times earnings, a discount to the S&P price earnings ratio. This seems illogical considering the Company’s entrenched position with the consumer and the hoard of cash on hand, more than $200 billion. The bear case is that Apple is a one trick pony, the iPhone being 85% of the company’s profits. Market saturation, slow down in their growth market of China, the iWatch’s less than stellar reviews are part of the bearish view.

We believe contrary to some expectations that the iPhone upgrade cycle will be a blockbuster. Since there is no longer a financial penalty in upgrading every two years on AT&T and Verizon’s latest plans, it’s reasonable to assume that most people will upgrade even when they might not have otherwise. The iWatch is an easy product for skeptics to dismiss, as it is admittedly unessential. I’ve been using my iWatch now for a month or more and I can say without hesitation, I love it with its many flaws and shortcomings. The bottom line- my very expensive Rolex does nothing but look attractive whereas the iWatch is a constantly changing information-age palette.

The only negative I could find in the most recent quarter, and its a small one at that is that, is that iPad sales are in fairly steep decline.  There could be a few reasons for that:

1.Larger iPhone is cannibfleizing some sales, especially from the iPad mini.

2.Market is fairly saturated now and there is no compelling reason to upgrade.  The older version works just fine.

3.Competition in the low end of the market has intensified

We are highly confident in the wisdom of owning Apple stock for the long term.  The Company has an entrenched loyal customer base that is growing at a much faster rate than the competition in every segment they are in.  Apple is buying stock back and if you sell it today, you will likely pay more for it in the near future.