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Apple's Fall Spells Opportunity For This Tech Stock

 January 31, 2013 05:10 PM

The most epic and motivational U.S. corporate success story may have just ended. Not only is Apple's (Nasdaq: AAPLshare price in the process of being decimated, its fall from grace is likely to adversely affect its major suppliers.  

But as you'll see later in this article, one of Apple's major suppliers has been able to dodge the bullet. 

Before I get to the stock, here's why Apple's demise has opened this incredible buying opportunity...

After launching successful product after successful product the world embraced, the stock shot from under $100 at the start of 2009 to $700 in August 2012. 

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Take a closer look…

Now, the rug under investors has been pulled out.

The stock has plunged all the way down to the current mid $400s. In fact, with a $413.89 billion market cap, the company has just lost its title as the world's most valuable company to No. 2 , giving the title back to oil giant Exxon (NYSE: XOM), which boasts a market cap of $416.50 billion. 

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And it's not just Wall Street that's punishing this high flyer. Main Street has jumped on the bandwagon, too. In 2011, for example, the company was in the top 10 most liked U.S. brands list, according to marketing research firm YouGov BrandIndex. The most recent survey indicates Apple has fallen to No. 11 on the list. 

The fall from grace

Apple's fall from grace is certainly not because of the fundamentals. During the first 2012 fiscal quarter (ended Dec. 31, 2011), Apple posted record revenue and earnings. Revenue for the period totaled $46.33 billion a 73% increase from the year-ago quarter. Year-over-year earnings of $13.06 billion were more than double the $6 billion posted before. The company sold about 37 million iPhones in the quarter, a whopping 128% growth from the year-ago period, and some 15 million iPads, another incredible increase of 111% year over year. 

So why is the stock still being punished? Because of investor over-expectation. 

Stocks always surge higher on hype, but when reality hits, they get knocked back down to Earth. In the case of Apple, reality couldn't live up to the hype. And now investors are finally realizing it's impossible for the company to maintain its growth rate. I called for Apple's imminent demise in this October 2012 article and it looks like the projections have come true. 

But what many investors aren't seeing is that as Apple's suppliers get hit by the stock's plunge, some rare buying opportunities are opening up, particularly for Cirrus Logic (Nasdaq: CRUS).

Having 60% of its business deriving from Apple, this iPhone chip manufacturer has definitely felt some damage from the stock's fall.

You can see from the chart that Apple and Cirrus Logic prices have tracked each other rather closely for the past three years, until just recently, where there has been a disconnect. 

Cirrus reported earnings a day after Apple and knocked them out of the park. Fiscal 2013 third-quarter revenue of more than $310 million was a record for the company and up 153% year over year. Earnings surged to $1.64 per share, more than 100% higher than the same time in the previous year, and beat the consensus estimate of $1.41 per share. The company's price-to-earnings (P/E) ratio is 8 and it boasts an incredible PEG ratio of 31, revealing growth potential in the stock. 

Guidance for the fourth fiscal quarter are lower, however, mainly due to Apple slashing orders. The company expects revenue to come in between $200 and $220 million, well below the $235 million analyst estimates. 

But I'm not worried about it.

Clearly, Cirrus doesn't have the over-inflated hype premium baked into Apple's stock and the solid numbers speak for themselves. Besides, Apple's products still sell like gangbusters, and Cirrus is diversifying its business into LED-lighting and audio applications such as amplifiers and video cameras. It has recently started to provide components to a top Chinese phone manufacturer, so it's slowly cutting the cord from Apple's dependency. 

Risks to Consider: If Apple continues lower, then it could adversely affect Cirrus. Change is the nature of the technology sector, so it's only a matter of time until it happens. Always use stops and position size properly when investing.

Action to Take --> Because of its solid balance sheet and price action, and despite Apple's weak streak, I think Cirrus is a compelling tech stock with a great buying opportunity now. The company has started to break away from Apple as its sole client, so it has a lot of room to grow from here. I wouldn't be surprised to see it at $40 within the next 12 months. This means Investors who buy the stock now could easily gain at least 40%.

-- David Goodboy

David Goodboy does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.


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