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At $381 Apple is Undervalued, Here’s Why

If you’re a trader, you constantly hear arguments for and against Apple .

According to Sanford Bernstein analyst Toni Sacconaghi Apple bears just don’t get it.

He argues that bears only see Apple as a growth stock. And Sacconaghi's proprietary research may reveal why - "We looked at 735 mutual funds; and our study showed Apple is over-owned by growth funds. It’s the most widely held growth stock.”

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Bears will tell you Apple's growth rate is unsustainable.

But Sacconaghi says, that’s not the right way to look at Apple.

“The company has over $80/ share in cash – take that out - and the enterprise value is $300,” he tells us. (That’s at a close of $381 on Friday December 16th). Also, he's crunched the numbers and according to his estimates the stock is currently trading at 8 times next year's free cash flow.

All told, that makes Apple a value stock.

Trouble is value funds haven’t caught on -- yet. That same study showed “Apple is significantly under owned by value funds and yield funds,” he adds.

He says if and when Apple pays a dividend that would attract “a meaningful new set of investors" that would drive shares higher.

Of course, Apple founder Steve Jobs wasn’t a fan of dividends, but Sacconaghi says CEO Tim Cook sees it differently.

“Tim is much more rational about it and I think there’s a much greater probability of it in 2012,” he says.

Trader JJ Kinahan likes the thesis. “(At $380) I would buy the stock and stay with it,” he says.

Although Steve Grasso is an Apple bull, he’s skeptical of the argument. “Although a dividend would be a short term positive I see it as a long-term negative because Steve Jobs was so opposed to dividends. Returning cash to shareholders would suggest to the Street that management is diverging from Steve Jobs' vision.”



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Trader disclosure: On Dec 16, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Grasso owns ASTM; Grasso owns AVAV; Grasso owns BA; Grasso owns D; Grasso owns LIT; Grasso owns MH; Grasso owns PFE; Grasso owns PRST; Grasso owns S; Grasso owns XLU; Kinahan is long C; Kinahan is long MSFT and short calls; Kinahan has INTC short puts; Kinahan is long YHOO

For Greg Salvaggio
No disclosures

For Kena Sena
YAHOO (YHOO): Evercore or an affiliate expects to receive or intends to seek compensation for investment banking services from this subject company

For Toni Sacconaghi
Bernstein currently makes a market in the following companies AAPL / Apple Inc

For Tavis Mccourt
McCourt is long GLD
McCourt is long GOLDCORP
McCourt is long ELDORADO
McCourt is long BARRICK

For Jeff Kilburg
Kilburg is long 10 year treasuries
Kilburg is long 30 year treasuries



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