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Apple Stock Has Discovered Gravity – But Don’t Sell

Well, all that talk about Apple (NASDAQ:AAPL) stock surging to four figures seems a little silly now … doesn’t it?

There are a few megabulls hanging onto hopes of $1,000 or more for Apple stock — I’m talking about these guys, one with a $1,650 target by 2015 and one with a cutesy $1,111 estimate — but most of us are more circumspect.

Here’s a short list of some of the things that have been weighing on Apple as it has slumped almost 20% in roughly a month’s time:

It sure looks like Apple has discovered gravity, doesn’t it?

Even so, while stratospheric growth appears out of the question, I’m not prepared to sell my personal stake in Apple just yet. By my read, despite short-term volatility, there’s a very good chance AAPL could get back to $700 or higher in the next year based on its historic valuation levels.

And a 20% gain is nothing to sneeze at.

So, I’m holding on to my Apple stock. And while I don’t think putting new money into Apple stock is incredibly wise right now, here’s why I think Apple is a hold — not a sell.

Recent Miss NOT a Demand Problem

A guide down for the current quarter coincides with a slew of new products, including the iPhone 5, new iPods, a flashy 15-inch MacBook Pro, the Apple Mini, a revamped flagship iPad, a new Mac Mini and redesigned iMac. Consider this WSJ article from September about iPhone 5 supply issues, and you’ll see this bottleneck is not necessarily a surprise.

Most Apple bears talk about a critical mass for the iPhone as better, cheaper alternatives emerge, yet it’s encouraging to see signs that this is a problem of supply, not demand.

The risk, of course, is that the bear case on demand will prove true eventually. But in the short-term, that doesn’t appear to be the case.

Valuation Is Reasonable Short-Term, Cheap Long-Term

Ready for some math?

Apple stock has a forward price-to-earnings ratio of less than 12.5 right now, based on about $585 per share in current pricing and 2013 EPS forecasts of about $47, according to Standard & Poor’s data. Not a screaming bargain, but hardly overbought.

But assuming 2014 earnings forecasts hold at $56, a P/E of 12.5 on that figure gets you to $700, right on the nose.

In other words, if the forecast doesn’t change and the valuation remains constant, you’re looking at about 20% upside for Apple stock from current pricing.

Dividend

Let’s not forget that Apple stock also pays a dividend. Right now, AAPL shares yield about 1.8% based on a $10.60 annual rate. Not huge, but certainly a nice sweetener –– especially for those of us with a cost basis significantly lower than current pricing.

The current payout ratio is 24% based on $44.15 in FY 2012 earnings, so the dividend is not just sustainable, but ripe for increases in the coming years as earnings rise. Consider that a 24% payout on $56 a share would net $13.44 in annual dividends, or a nearly 27% increase in payout! That’s a year or two down the road, mind you, but not insignificant when plotting long-term potential.

Cash King

Enough complicated math. Here’s a simple figure with no calculations: $121.25 billion.

That’s the size of Apple’s cash hoard!

Even if you back out the foreign cash, there’s still $54.3 billion on the books at Apple — enough to buy both Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL), with $10 billion left over for a hell of a buyout party.

Check out the screenshot from Apple’s 10-K if you think I’m making these figures up.

On the Other Hand …

All this said, I still have some serious concerns beyond the technicals and the earnings trouble.

China: Tim Cook was quick to point out in the recent earnings call that iPad sales were up 45% in China, and the iPhone was up 38%. That’s great … but China is far from reliable, as we’ve seen with auto sales, among other big-ticket consumer items. Furthermore, I remain a bit troubled at how little market share Apple has scrounged up in China for its iPhone, thanks in part to a lack of telecom subsidies like the ones Verizon (NYSE:VZ) and AT&T (NYSE:T) provide so willingly in the U.S.

Cannibalizing Sales: There also is the risk of cannibalizing sales. Logically, you have to wonder how Macbooks are going to fare in the age of tablets — and even how iPad sales will fare now that the iPad Mini is out at a lower price point. Apple has managed to successfully disrupt itself in the past — the decline of the iPod amid the rise of the iPhone, for instance — but this time it might feel the pain on margins. For instance, CFO Peter Oppenheimer put gross margins at the Mini “significantly below” other products.

First-Mover Power Fading: Though fanboys won’t admit it, there’s the real risk of disruption from a new generation of slick Google (NASDAQ:GOOG) Nexus tablets and the enterprise potential of the Microsoft (NASDAQ:MSFT) Surface tablet. Apple created a new product category with its iPhone and iPad … but hey, Research In Motion (NASDAQ:RIMM) and its BlackBerry were once synonymous with on-the-go email. How’s that working out lately?

So needless to say, I’m optimistic, but I’m also cautious. I’m sticking with Apple but, again, new money should probably sit this one out.

I have a cost basis of around $510 for my shares and am letting it ride. But if you have shares at a lower price point, it might be prudent to take partial profits, particularly if Apple stock remains an overweight position in your portfolio.

And if I’m proven right? The next time it hits $700, I’m likely heading for the hills.

Take that to the bank.

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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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