Apple’s PE hits lowest level since 1995. Trading at under 9 times ex cash. Time to go all in?

We have been bulls of Apple shares around these levels (see here – Long Apple @ $533 (66% of position size) with a Feb $490 v $440 1 x 2 Put Spread running – net cost $4. Added to long position @ $508 – 27 Dec 2012) and believe that an important bottom was put in on Tuesday of this week when the stock touched an intraday low of around $483.

As we can see from the chart below, Apple’s PE (even without adjusting for the tax adjusted cash of around $100bn) is now back to where it was at the nadir of the GFC in 2009 – a time when fear was all pervading and the end of the world as we knew it appeared nigh! What has happened to warrant such a multiple compression in Apple’s valuation?

In recent weeks there have been numerous news stories that Apple are cutting component orders from their various suppliers – although there have been conflicting “industry checks” in relation to this; stories surrounding the iPad mini cannibalising the iPad sales, through to a reversal of market share with the iPhone in the key cellular US market.

On the bull side, it seems that they are getting closer to penetrating the massive Chinese market this year and if this occurs and the worst does not come to pass on the earnings front next Tues, then we expect a run back towards the $600+ level before the first quarter is out.

At the close of play yesterday, backing out the cash and assuming the median analyast estimates that have been pared down in recent months are fair, then the stock is trading on a current year PE multiple of 8 times. This is half the broader market. Numerous catalysts could push the stock materially higher including a much bigger stock buyback, special divi, major acquisition etc.

With results next Thursday, those of a nervous disposition should probably sit it out. Those who embrace risk more in their trading and understand risk:reward might want to follow our lead and position accordingly ahead of the results. The chart below looks and smells strongly of a strong short term rebound to me. The Apple bear trade is exhausted and long in the tooth now after a near 30% shakedown, and the volume seen on Tues displayed evidence of capitulation by some of the overweight funds to us.

Regular readers will have gathered now that, on fundamentals, it is exceedingly rare that we are wrong. We may be a little too early but we believe that with appropriate margin control, that it is better to be early to the bus stop than late.