How to Make Money in Apple (AAPL, $388.66) Stock

Apple (AAPL, $388.66) reported another blowout quarter yesterday, which, based on the company’s rapid year-over-year earnings growth, shouldn’t come as a surprise to anybody.

Apple Shares Jump After Record Sales — Bloomberg.com, July 20, 2011   “Net income in the period more than doubled to $7.31 billion, or $7.79 a share, from $3.25 billion, or $3.51, a year earlier, Apple said yesterday in a statement. Sales climbed 82 percent to $28.6 billion. Analysts had predicted profit of $5.87 a share and revenue of $25 billion, according to Bloomberg data.”

Morgan Stanley has an Overweight rating on Apple, with a price target of $468. “Key catalysts over the next six months include: 1) launch of Mac OS X Lion; 2) launch of iCloud (Fall 2011); 3) new iPhone with possible price cuts on older versions in September; 4)new iPad launch with possible price cut this Fall; and 5) improving component costs and manufacturing yields which put upward pressure on margins or at the very least offset the negative impact from revenue deferrals and lower iPhone/iPad prices.” — Morgan Stanley Research, July 20, 2011

Projected consensus earnings growth for Apple is 65%, 17%, and 15% for fiscal years 2011 through 2013. Many investment firms are revising their numbers upwards right now, based on Apple’s tremendous earnings report yesterday. The price/earnings ratio (PE) is 15.5 based on 2011 earnings projections of $25.04 per share.

Apple stock has a pattern of steadily trading in a predictable range for six months, then launching upwards to new highs and establishing a new trading range, and then doing it again. The stock traded all year in the $330-$360 range, and now it’s in the “launching upward” phase. Based on previous patterns, it’s too late to buy Apple below $360. If I were interested in owning the stock, I would buy it right now.

I know that some investors think that Apple’s price is “too high”. Those investors should read  The Relative Importance of Price Per Share, and then go back up the page here to the earnings and PE numbers. Apple stock is not over-priced by any normal valuation methodology.

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