Apple – Sell The Rumor, Buy The News?

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Our longstanding readers know that we focus on leading stocks. Why? Because by definition, those are the stocks that are moving higher and leading the market. Our definition of leadership is simple – we always ask: Is the stock outperforming the market and its peers? Then we run additional screens to focus on the creme dela creme.
Every once in a while something shows up on our radar that jumps out at us and today it’s all about the Big Apple. No, not our beloved hometown of NYC, but Apple Inc ($AAPL). Apple is one of the most attractive undervalued growth stocks in the market right now. As a quick refresher – typically growth investors look for stocks that exhibit strong sales and earnings growth and value investors look for stocks that are undervalued.
Undervalued stocks do not typically sport strong sales and earnings growth and growth stocks typically come with a high multiple (a.k.a P/E ratio). But every once in a while, for various reasons (mainly because we believe prices on Wall Street are based on perception – emotions – and are not always rational) we find undervalued growth stocks. Apple fits the definition perfectly. Over the past few years, Apple continues to enjoy very strong sales and earnings growth (both on a quarterly and annual basis), has a ton of cash, virtually no debt, and a P/E ratio of 13! Meanwhile the P/E ratio for the S&P 500 is in the mid teens…which makes Apple a real bargain for those that like undervalued stocks.
Later today, Apple will hold its September “event” and announce a lot of new products and upgrades. In recent years, AAPL would rally all summer than fall after the September event (buy the rumor, sell the news). This year we are seeing the exact opposite occur, Apple is trading -16% below its all-time high and has fallen hard ahead of their event. Apple’s eco system is second to none and a few new “products” will definitely help fuel their very strong sales and earnings growth. This may be a classic case of buy the rumor and sell the news in reverse – sell the rumor and buy the news. Just some food for thought ahead of the event. We prefer to buy stocks in uptrends and will be interested once AAPL trades above 118. But for now, based on our discipline, patience is king.