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Apple Gets Its Swagger Back

Well, the implosion of Apple (NASDAQ:AAPL) certainly was dramatic — a headline decline of $200 a share and a 25%-plus slip in prices across about seven weeks. But now, Apple has tacked on 10% since Nov. 26 and is flirting with $600 again.

Those folks who panicked and ran for the exit might be kicking themselves, because it appears that momentum might continue.

In full disclosure, I am long Apple — in case you couldn’t tell from my recent writing on Apple here, here and here where I urged investors to hang on, just like I was doing.

Well, I’m here to urge you again to stick with Apple stock. Here’s why:

  • Bullish short-term momentum: Andrea Kramer of Schaeffer’s Investment Research points out that Apple topped its 10-day and 20-day moving averages four days running — “a feat not accomplished since mid-September, when AAPL was flirting with all-time highs.” Of course, it is worth noting that Apple is bumping up against its 200-day average after this recent pop.
  • Supply Problems, Not Demand Problems: Yes, Google (NASDAQ:GOOG) and Android-powered phones are a serious threat — as is the Amazon (NASDAQ:AMZN) Kindle. But consumers have hardly given up on Apple. The continued narrative that Apple’s October earnings miss was a supply problem not a demand problem seems to be holding water based on recent reports. And if you believe this angle, then the all-important holiday sales season could be huge for Apple as it irons out the kinks in its supply issues.
  • Citi Initiates Coverage with a Buy: Though perhaps not thrilling to those of you hoping for Apple to hit $1,000, Citigroup (NYSE:C) just initiated coverage with a buy rating and a $675 target this week. That makes the firm the 51st to put a buy reading on the tech giant. And $675 is admittedly “only” 13% upside, but that’s still a decent return in a choppy market.
  • Management Shakeup: Though some have worried that the departure of Steve Jobs protégé Scott Forstall could signal trouble — especially coupled with Apple firing its retail boss after a mere nine months on the job — I am of the mind that this kind of creative destruction is necessary and actually encouraging. Apple clearly is in need of a shakeup, even if just a cosmetic one to appease investors, and this kind of move means the company will not let entrenched leaders get a pass just because of time served. That’s ultimately good for continued innovation and competitiveness.
  • Dividend (and Yield on Cost): For a brief time, Apple was yielding about 2% when it was valued in the low $500s. And with a payout of $10.60 a year, those of us who have been hanging on to Apple for a while enjoy an even more attractive yield on our original cost basis. Consider that if you bought at $400 a share in January, your yield is 2.6%. If you bought at $250 a share in 2010, your yield is a whopping 4.2%. Why would those of us with a decent dividend — and hopes of a bigger dividend going forward as Apple sits on a mammoth war chest and has a payout ratio of just 22% — trade in a yield like this for something else? What 4%-yield stock out there looks better right now, I ask you?

There are some bearish points, of course:

  • A $425 Floor? Some bears still lurk. In early November, bond guru Jeffrey Gundlach said that Apple stock could plummet to $425. That would be another 30% slide from here. Most technical analysts plotted roughly the same downside after the dreaded head-and-shoulders formation drawn in AAPL in late September-early October.
  • Earnings Misses: The fundamentals obviously haven’t changed significantly since Apple earnings missed expectations in its latest report. It used to be that analysts would call any miss “rare,” but the company fell short of sales and profits earlier in 2012 and also late in 2011. The fact that these misses are coming more frequently is cause for concern.
  • Magic Is Gone: To some investors, the fail-proof status of Apple has been ruined forever by this quick slide. Anyone familiar with behavioral finance knows that our losses hurt us more than our gains make us happy … and the switch has been forever flipped on AAPL after this slide, with investors now wondering if another lurch down is just around the corner.

I try to always look at the downside of Apple, as these points show. But on balance, I remain convinced there are no better places to move my money to just yet … especially considering my yield on cost from buying in earlier this year when prices were under $500.

Does that mean Apple is a buy for new money right now? Maybe not. But if it does crash to $425 as some of the bears expect it to, I will be adding to my position — and you should too.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple.

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