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Apple's New Products Create 25% Upside Opportunity

This article is more than 9 years old.

Apple (NASDAQ:AAPL) is expected to announce their next generation products on September 9. Eugene Groysman has been making the right calls about Apple for a long time so I wanted to find out if he is buying or selling in advance of the announcement. When it comes down to it, I want to listen to the investors who have experience winning with stocks.

The last time we spoke to Eugene about Apple he was adding to his position at about $660 right before the stock was set to split 7 to 1. With the stock trading at a split-adjusted price of around $713, Eugene’s decision to buy more in advance of the split appears to have been another good decision.

You can view Eugene’s top 5 holdings, learn more about his strategy, and track his progress with monthly Performance Insights emailed directly to you at the end of each month.

Ken Kam: Hi Eugene, it looks like your last trade in Apple has worked out well.

Eugene Groysman: Yes, adjusted for the split, it is trading at $712.95, so it has gained about 8% in a matter of just two months.

Ken Kam: The post-split 52-week low was $63.89 in October 2013. It’s now trading at about $103, so it is getting close to a double in the past year.

Eugene Groysman: I know! It’s up over 80%!

Ken Kam: What has changed for Apple over the past year to warrant it almost doubling in value?

Eugene Groysman: In my opinion, investors are no longer buying into the short-side narrative that Apple can't continue to grow. What has helped was inking the deal with China Mobile late last year. When their numbers were reported for the first quarter this year, they beat all expectations.

Ken Kam: The short side still has a point though. It is hard to see how Apple can double again. What do you see on the horizon that could help make this happen?

Eugene Groysman: I have a 12-month target of $127, or about another 25% increase. That is solely based on their current offerings, but I think I will adjust higher when their numbers come out after the launch of the new iPhones. They are going to release two versions, a 4.7in and 5.5in.

Ken Kam: What are you expecting to see in the new iPhones?

Eugene Groysman: From the physical aspect, they are looking to extend the battery life and add a new screen.

Ken Kam: Tell me more about the new battery and screen. Are either of these game-changers?

Eugene Groysman: The battery increase is not a game changer, but it will help alleviate a lot of concern people regarding the life of a single charge. As people continue to increase their phone usage for various activities ranging from email, to web browsing, to gaming, they use more power. The current battery packs are not sufficient to keep up.

Ken Kam: That makes sense. What about the screen?

Eugene Groysman: The current screens use gorilla glass, which is very sturdy, but the new ones are rumored to be made of sapphire crystals.

Ken Kam: Who is manufacturing the new screens?

Eugene Groysman: GT Advanced Tech (NASDAQ:GTAT) is making the new screens for Apple.

Ken Kam: Do you own them?

Eugene Groysman: Yes, once I learned of the switch, I looked into what company would be producing them. I purchased them a few weeks ago. I took a moderate position of about 2.5% and paid $16.15/share.

Ken Kam: They are currently trading at $18.67, so this position is starting out well for you. Who makes gorilla glass?

Eugene Groysman: Corning (NYSE:GLW) makes gorilla glass.

Ken Kam: Is the loss of the Apple iPhone going to affect them?

Eugene Groysman: At this time it is hard to say since they are a mature company with many lines and many other clients.

Ken Kam: Do you think the new iPhone will take market share away from Android?

Eugene Groysman: Yes. The new phones will offer larger screens which many people have been waiting for. Here’s a personal example. My mother owns a Samsung Galaxy because of its large screen. However, when her employer got her an iPhone for work, she fell in love with the way it functions.. She has commented on the ease of use and functionality and is eagerly waiting for the release of the 5.5 inch iPhone.

Ken Kam: So you’re saying that in the past, the larger screen has been a reason to choose Android, but the new iPhones will remove screen size as a reason to choose Android? That makes sense. Will the new battery have a similar impact?

Eugene Groysman: To an extent, but not like the larger screen. The battery has never been a serious deal breaker for consumers.

Ken Kam: How confident are you about the new screen being made of sapphire?

Eugene Groysman: Apple invested $700 million into GTAT to open facilities to produce this product -- one in Arizona and another in Massachusetts.

Ken Kam: What advantages does the sapphire product have over gorilla glass?

Eugene Groysman: The new glass will be virtually scratch resistant. This is the same type of material used in high-end watches to help prevent scratches. It is nearly unbreakable, with some exceptions.

Ken Kam: You’re betting that the new iPhones will drive the stock up about 25% from here?

Eugene Groysman: Yes. I believe that people who did not upgrade to the 5s or the 5 will with these two new offerings, and people who are using the Android because of the larger screen will switch. My father, the most non-tech person I know, had an Android, and just got the iPhone 5s. He has started text messaging now, which he attributes to the iPhone’s ease of use.

Ken Kam: The shorts will repeat their arguments that drove the stock down pre-split from over $700 to around $550. They just think that it’s too hard for Apple to continue to grow.

Eugene Groysman: The way that I see it, there are two types of shorts. There are the ones who come out against Apple because they do not like Apple's offerings and truly do not believe in the company. The second type of shorts are the ones who create the negativity around the company and try to drive the price down to capitalize on their negative spin. The second type actually do not have an opinion one way or the other. They believe they can make more money on the downside than the upside, and so they will try drive the price down as far as possible using any means possible to do that.

Ken Kam: The shorts succeeded in depressing the price the last go around but their opinions on Apple’s products have largely been disproved by their results. That’s why the stock has nearly doubled in the past year. But, Apple just recently got back to about where it peaked, so those who held for the past year are basically flat. All that to say, I am asking if you think the shorts will create another trading opportunity for you?

Eugene Groysman: Actually, I think the shorts will be stopped out. The stock will not hit their price points, and in fact, climb higher and force them to cover.

Ken Kam: Thanks Eugene.

My Take:

Usually we focus on stocks that have the potential to double. I cannot see how Apple can double from here, but looking at the 52-week high and low, I can see how someone who knows the stock well could get a double out of Apple by trading it well. Having said that, the potential for a 25% gain in a few months is enticing and given Eugene’s track record with Apple, I’m willing to follow his lead. I will check in with him again when Apple gets close to his target.

Connect with Ken Kam on LinkedIN.

Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.