Stock Report

I don’t usually post stock advice, but Apple, Inc. (AAPL) is not the usual stock. Their products have a cult-like following and owners will soon have an opportunity to buy shares of Apple’s stock at a somewhat reasonable price. But does that mean AAPL is a good investment?

Apple, Inc has announced that they will split their stock on June 9 for shareholders of record on June 2. For each share of AAPL owned, investors will receive 7 shares of new AAPL stock. Many times I hear novice investors naively celebrate splits, because of course, “more is good.” But the reality is that in a, strictly financial sense, a stock split is completely neutral. If the split were to happen at AAPL’s current price of about $620 a share, each share will become 7 shares but at a new lower value of $88.57 per share, or a total value of $620.

So why the excitement? In stock investing it is easier (meaning more cost effective) to transact stocks in what we call even lots of 100 shares. At the current price of $620 a share, 100 shares would be a $62,000 investment. More than most individual investors wrap up in a single stock. So in theory many investors will use the new lower price to “round up” their holdings to round lots of 100 shares, or new investors will buy into AAPL at the new lower, more affordable price. Such buying action would drive up the price of the stock.

The question is then, “Should you buy or sell AAPL now before the split”? Regardless of the price of a share of stock its value is determined by such things as revenues, sales,  profits, assets, etc. Remember the value of each share of stock is relative to its financials and is identical before and after the split. So you should only make an investment decision based on those financials, not on whether or not the stock splits. In the case of AAPL, we have a fair value of about $700 a share pre-split, which would be $100 post split. In other words AAPL has room to move up about 12% to be fairly valued. Too me that is a good reason to hold onto AAPL if you are long or own the stock now. A trader can probably make a quick profit, as I do think the stock will benefit from increased demand. A long term investor can get off to a good start with a quick gain, pocket a 2.14% dividend and wait for Apple’s new products to boost long term earnings. But a better strategy might be to avoid the hype, be patient and see if AAPL settles back down in price after an initial run, post split.

410 Advisor, LLC does own shares of Apple, Inc. in our clients’ portfolios. There is no guarantee of future results. Comments made are forward looking and as such opinions can change on a daily basis based on new material facts as they are presented.

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bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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