The Trade: Apple Bottoms as CEO Steps Up

CNBC

Suffering shareholders in the one-time most popular stock may finally have reason to celebrate: The Apple bottom is in.

Many reputations have been sullied in trying to call the bottom in Apple (AAPL) since it plummeted from its lofty perch above $700 last September. But this time, all the stars are aligning for the iPhone and iPad maker.

Among the reasons Apple fans say to buy the stock now: a record-breaking stock buyback program, an amazing valuation, a technical breakout in the stock chart and a ramp-up in the current uninspiring product cycle. Plus, Chief Executive Tim Cook is finally stepping out of Steve Jobs ' shadow.

By their count, the stock is poised to rise at least 10 percent this summer to above $500.

"Investors are getting adjusted to the new Apple and that's Tim Cook's Apple," said Anthony Scaramucci, who oversees more than $7 billion for SkyBridge Capital. "There was a large amount of selling by the disappointed Steve Jobs' cult members, but now the low valuation and anticipation of a revolutionary product cycle has some of the smart money getting in."

Apple confirmed it will reveal its operating system, which supports its unmatched ecosystem of apps, at the company's Worldwide Developers Conference beginning June 10. Investors believe Cook may have even more up his sleeve.

Any surprise revealed next week could light a fire under this stock, be it a much-speculated-about wearable device, a value-priced iPhone or better yet, a sleeker new iteration of the iPhone with a wider screen.

(Read More: Behind Apple's Bold and Risky New Hire )

Still, it's the valuation that has the big money looking at the stock again. Apple is the biggest long equity position in David Einhorn's Greenlight Capital, after the firm bought 1 million more shares in the first quarter, according to filings data compiled by InsiderScore.com. It was the No. 2 position for John Calamos' Calamos Advisors at the end of the first quarter, according to the data.

What's more, some major hedge funds have been buying more of the shares in the second quarter, according to sources. One hedge fund with more than $5 billion under management and run by a noteworthy investor was buying the stock "like crazy" in April and May, according to a source familiar with the manager's movements.

If one values Apple at just six times enterprise value to free cash flow, the stock should be trading at $500, according to longtime technology analyst Steven Milunovich of UBS.

And Milunovich said in a note to clients that his bare bones valuation was a "discount to the [tech] group based on lack of visibility."

And things could get a lot more visible soon during next week's conference and beyond, investors and analysts said, rebutting the talk that Apple's revolutionary product cycle is through.

Based on patent filings by the company, Milunovich believes a watch, an electronic wallet, a smart pen and greater automotive integration could all be ahead for Apple.

(Read More: Tim Cook: Several Game Changers Ahead )

But back to just pure financial analysis, in late April Apple added $55 billion to its capital return program, saying that it would now give $100 billion back to shareholders by the end of 2015 in the form of buybacks and dividends. To help fund that program, Apple tapped the bond markets with a series of note offerings at bargain basement rates totaling $17 billion, the largest nonbank debt deal ever.

(Read More: U.S Takes Apple to Trial Over e-Book Price Fixing )

Apple upside "is likely $500 to $525 a share," said Doug Kass of Seabreeze Partners Management. "Free cash flow generation will be meaningful and will support continued buybacks and dividend increases."

"Investor sentiment could hardly be worse, as the company's shares have gone from hero to goat," added Kass in a note on May 23.

Leading that sentiment change is a bolder Tim Cook on display, starting last month in front of Congress, when he was hauled in front of the Senate's Permanent Subcommittee on Investigations to explain the taxes the company pays on foreign profits.

Led by Sens. Carl Levin and John McCain, the hearing was supposed to embarrass Apple's use of offshore units to avoid paying taxes on billions of dollars of profits even though it was legal. But this didn't play out as planned.

Instead, a confident Cook turned the tables on the lawmakers by putting the emphasis on the complicated tax code and Apple's contribution to the country, even with most of its production overseas. "We are proud to be an American company and equally proud of our contribution to the U.S. economy," Cook said at the hearing in a Patton-like moment. "We pay all the taxes we owe, every single dollar."

By the time the it was about over, even Levin pulled out his iPhone with a yellow cover and said, "I love the iPhone. ... It's a brilliant device."

(Read More: Tim Cook: We Pay 'Every Single Dollar' in Taxes Owed )

Cook continued to step out from Jobs' giant shadow a week later at All Things Digital's executive conference in California by talking off the cuff of bold things ahead, addressing the drop in the stock and even ripping into Google (GOOG) Glasses.

"We have several more game changers in us," Cook said during a long conversation before a packed crowd where the CEO often smiled and looked relaxed while wearing a blue sport coat.

Wearables is an area "ripe for exploration," he said, hinting at the iWatch.

In an obvious reference to Google's quirky Glasses product, Cook quipped, "I don't know a lot of people that wear them that don't have to."

Options traders are also betting on the Apple bottom. Goldman Sachs sent a note to clients a bullish position through the purchase of call contracts ahead of the June 10 conference.

"We expect this event to once again be a positive catalyst for shares-this time driven by refreshes of existing services (iCloud and Siri) and/or a preview of the new iOS7 operating system," wrote Goldman's Katherine Fogertey. "The options market has underestimated the positive nature of this event in the past."

In the last 10 years, Apple's stock rose an average of 5 percent from 10 days before its Worldwide Developers Conference to one day after the event, according to Goldman data.

"With a forward P/E of 11.3, it's a pretty compelling buy now," said Scott Nations, options trader and president of NationsShares. "Add the financial acumen they just displayed by selling that huge bond issue at the tippy top of the market and you have a nice long in a market without many nice longs."

Both Jon Najarian and Pete Najarian of TradeMonster.com bought Apple call options last week after the Goldman note.

Still not convinced?

Even technical analysts, who make buying and selling decisions based solely on price patterns, are chattering about a potential bottom forming in Apple. The stock last month had a clear breakout above its 50-day moving average, a basic, but often-followed measure of changing sentiment.

Going even deeper into the world of technical analysis, a call by Arthur Hill at Stockcharts.com that Apple was forming a bullish inverse head and shoulders pattern was making the rounds on trading floors.

An Apple breakout above the so-called neckline at the $460-$470 level could mean the next stop is the 200-day average price of $525, according to the note.

Apple is down more than 30 percent from its all-time high reached in late September-an ugly bear market made even uglier as the rest of the market rallied to record highs.

"Do I look at it?" Cook asked during the All Things Digital Conference. "I don't have my head stuck in the sand."

It's OK to look now Mr. Cook. You've earned it.

_ By CNBC's John Melloy. Follow him @CNBCMelloy on Twitter.



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