Yesterday we heard the news about Steve Jobs taking immediate medical leave.  Here’s Steve’s note to Apple employees –

Team,
At my request, the board of directors has granted me a medical leave of absence so I can focus on my health. I will continue as CEO and be involved in major strategic decisions for the company.  I have asked Tim Cook to be responsible for all of Apple’s day to day operations. I have great confidence that Tim and the rest of the executive management team will do a terrific job executing the exciting plans we have in place for 2011.
I love Apple so much and hope to be back as soon as I can. In the meantime, my family and I would deeply appreciate respect for our privacy.
Steve

First, we wish Steve Jobs well and pray that he will be healed of his cancer.

Here are our thoughts about Apple Inc. from our standpoint as an investor –

1. Apple’s decision to coordinate the release of the news about Steve’s medical leave during a holiday, while the markets were closed and the day before reporting in all likelihood very strong earnings – was very smart.  On any other market day, the stock would have been terribly shaken.  This way, investors had time to think before simply hitting the “sell” button.

2. Many investors sold shares this morning on the news, but the stock has recovered well.  Apple reports quarterly earnings today after the close and the numbers are probably going to be very good.  Let’s say that the earnings come in at $5.50/share for the last quarter.  Annualized this means earnings of perhaps $22/share going forward.  Apple at this moment is selling for $339/share.  $339/22 = 15.4.  Therefore, Apple’s current price earnings ratio is possibly approximately 15.  This is a slight discount to the market average P/E of around 17, and certainly a major discount when we take into consideration that Apple grew last year at a rate of +66%!

3. Any time that a major US publicly traded company “losses” its CEO, by and large you can expect an approximate -10% hit on the stock.  However in Apple’s case, Steve is still somewhat involved in the management of the company AND this is not the first time that he is taking a leave of absence.  So Apple is not “losing its CEO” AND the management team in place has demonstrated excellence in handling the company during Steve’s previous absences.  OK.  This morning the stock could have been down -10% or more in value, but fortunately it wasn’t.  It wasn’t clear how far Apple would sell-off (Steve Jobs has rockstar status and is loved by many), but – as we wrote above – thankfully it has recovered well.

4. As a general rule of thumb, we don’t like to hold our stocks going into earnings.  In this case however – with the stock recovering well –  we are probably going to hold our stock beyond the close today and see what earnings bring.  This is our own choice.  Each investor must decide something like this for themselves.  We will keep our stop in down around $320/share.

5. Many financial firms who rate stocks in order to bring attention to themselves and also to the stocks that they are talking about, have initiated buy ratings on Apple stock.   During the month of December we saw “buy rating” one after another come forth on Apple and yet the stock didn’t move higher.  Red-flags were inching up in our minds about Apple.  Beware of a stock that has had a strong run, is sitting at highs, receives strong buy ratings, and doesn’t move higher with a favorable market!  BUT in this case, Apple held on and pushed higher finally on the first trading day of the year.  On that day, we got on on board with Apple and announced our move to all of you.  Since then, several more financial co’s have announced their favor of Apple Inc. and given targets in the $400 range.   Apple has moved nicely higher.  Today after the close we will see how Apple is doing with their earnings.

6. While we believe that competition is heating up  for Apple Inc. in the iPad space and in phones, we believe at this time that their earnings are going to be strong.  Their forecast for the rest of the year however will likely reflect increasing competition and may cause the stock to bounce around a bit.  If it appears that competition is getting a strong foot in the door, then the Apple stock may well sell off on expectations of reduced earnings going forward.

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