Is Apple Losing Its Buy Status?

With shares of Apple (NASDAQ:AAPL) now trading at $604, is the company a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The latest big success story of the stock market delivered bad news this week after announcing earnings that failed to meet the high expectations that have come to be associated with Apple. Shares fell in after-hours trading on October 25, the day of the earnings, down about 13 percent from the highs they had touched just a month ago by first heading into the $700s.

Even though Apple’s fiscal fourth-quarter earnings climbed a healthy 24 percent to $8.22 billion, or $8.67 a share, from $6.62 billion, or $7.05 a share, a year earlier, predictions had pegged it at $8.75 per share. Revenue grew 27 percent to $35.97 billion marginally bettering the expected mark of $35.80 billion. For a company known for its love of high profit margins, the drop of that number from 40.3 percent to 40 percent, though fairly tiny, was symbolic.

It had also received some user criticism recently after it got rid of Google’s (NASDAQ:GOOG) Maps software in its iOS devices with a homegrown app that many found sub-standard and a few hardware issues regarding the iPhone 5.

Apple has been a huge winning stock pick for Wall St. Cheat Sheet Newsletter subscribers. Don’t waste another minute — click here and get more of our CHEAT SHEET stock picks now.

This is the time the company is supposed to be on a high. It launched the latest version of its smartphone, the iPhone 5, last month and earlier this week, unveiled a smaller tablet as well as the next-generation of its full-sized and bestselling iPad. It also launched a host of new computers. So while the investor disappointment that came with the earnings miss is being reflected in the share price, Apple and its shareholders will be looking keenly at the upcoming quarter. With several new products to sell, Apple’s traditionally strong holiday quarter holds slightly more significant meaning this time around.

H = High Quality Pipeline

Apple’s product line is, at the moment, something that hasn’t ever been healthier. With a brand new smartphone, a refreshed iPad, a smaller, new line of the iPad, and new computers all having been released in quick succession, Apple’s latest offerings to its customers are solid. However, one of the biggest questions plaguing the company in the past quarter has been about its inventory and by-now-obvious supply constraints.

Fears that it did not meet the high demand for the iPhone 5 ultimately turned out to be somewhat overstated, as the company managed to sell 26.9 million units of its smartphones in the three months. But the iPad mini started its first day or pre-orders on the morning of October 26 by quickly delayed shipping times, and supply chain experts and analysts say managing component constraints will determine the shape of Apple’s quarter.

E = Equity to Debt Ratio is Zero

Apple has maintained a debt-to-equity ratio of zero over the past few quarters, a very impressive feat when you compare its numbers to its major competitors. We also need to consider total debt and total cash on hand. Apple has no debt while owning $27.65 billion in total cash. Microsoft (NASDAQ:MSFT) has a debt-to-equity ratio of 0.19 with $12.78 billion in debt and $62.04 billion in total cash, while Hewlett-Packard (NYSE:HPQ) has a debt-to-equity ratio of 0.93 with $29.78 billion in debt and $9.53 billion in total cash.

T = Technicals on the Stock Chart are Strong

As of October 26, the stock price is 5.6 percent below its 20Day Simple Moving Average, 8.58 percent below the 50 Day SMA, and 3.21 percent above the 200 Day SMA. Since the beginning of 2012 the stock price has been in upward trend and is up 49.14 percent year-to-date and up 50.77 percent year-over-year.

E = Excellent Relative Performance to Peers

Many investors favor Return on Equity as a key metric to how well the company is operating. Apple’s operational performance is much healthier than its peer companies. The iPhone maker has an ROE of 44.32 percent while rival Microsoft comes in much lower at 24.5 percent and Hewlett-Packard has an ROE of negative 15.78 percent.

Operating margins are also critical for stock evaluation. Apple does better with a margin of 35.62 percent compared to 27.46 percent for Microsoft and negative 3.08 percent for Hewlett-Packard.

T = Trends Support the Industry in which the Company Operates

The iPhone has been of Apple’s most profitable products over the years and it happens to exist in an industry that has tremendous potential, according to most predictions. According to a recent report, the total installed base for smartphones worldwide hit 1.04 billion in the third quarter. Just a year ago, this number was 708 million. The same research said that smartphone penetration was still relatively low, with markets such as China, India, and Africa still waiting to be conquered.

Tablets, which are part of another industry that Apple has made its own, are also set to increase in demand. According to IDC, the worldwide tablet market will reach 165 million units next year and 260 million units by 2016.

Conclusion

Apple is facing several challenges in the coming few quarters. It needs to get rid of the growing perception that its product changes are boring and not significant enough, it needs to ensure that new rivals, especially in the tablet space, do not start forcing it to sacrifice margins, and it needs to gather its resources to enter or expand in all possible addressable markets. But it’s undeniable that Apple still carries a mysterious hold over buyers and interested investors. It has healthy financials as well as growth prospects and despite recent bearish concerns, appears in far less trouble than many of its rivals.

Apple looks like a BUY based on the key metrics above.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.