The two main reasons I believe Apple’s stock price is so depressed currently are 1) no stock has created more capital gains for investors over the past few years than Apple. Those investors due to get hit with a larger capital gains tax rate in 2013 took advantage of the lower rate before year end by selling the stock. 2) Investors are questioning Apple’s ability to compete with Google in the smartphone space. There are plenty of cheap, if not free, smartphones out there built on Google’s Android platform that are a pretty good alternative to the iPhone.

I’ve owned iPhones and a variety of Android devices over the past few years. Right now I have the iPhone 5, my wife has the 4S and my teen/tween kids have a couple of those cheap (free) Android phones (and iPads). I strongly believe that the iPhone’s and iPad’s biggest selling point is the overall quality. The build quality, software quality and especially the quality of the apps designed for iOS devices are simply better.

However, Apple must do two things with the next version of iOS. They have to improve iCloud. This is where Android beats the iPhone hands down. On an Android device you never have to think about syncing contacts, photos, backing up your device, etc. It’s all done for you in the background and it works great. The iOS experience in this area is clumsy at best in comparison.

The other thing Apple must do is make apps talk to each other better. It’s super easy to switch from app to app but sharing between apps is sometimes impossible. This is a major hurdle. Today’s online experience is dominated by sharing. Social media is huge because it allows us to share things online. Apple has to recognize that we love the apps but we have to be able to share things between them.

As for competing with Android on the low end I truly don’t think Apple has to go there. If they do these things with the OS and truly represent a higher quality experience then they can hold their ground on price. People know that they get what they pay for. This is why so many folks have learned that paying up for a Mac is worth it when it allows you to upgrade from a drab, frustrating windows machine.

If the stock price doesn’t rebound soon, however, institutional investors will start to ask the company what it plans to do to ‘unlock shareholder value.’ So what can Apple do outside of their business operations to enhance shareholder value?

What if the company increased the dividend? Apple could easily pay out $20 per share in dividends every year. This would give the current stock price a yield of nearly 4%. Compare that to the 10-Year Treasury that pays less than 2% and I think investors would immediately bump up the share price to participate.

Still, I think there’s a more attractive opportunity for the company. What if Apple bought back 200 million shares? With over $120 billion in cash on the balance sheet it would be totally doable for the company. It would be a massive benefit to shareholders by reducing the total share count by 21% and it would only take 2 years worth of cash flow to get it done.

The company’s earnings per share would immediately surge nearly 30% on the lower share count from $44 to $56. This would take the company’s price to earnings ratio from 12 to 9. If the multiple (valution) were to simply stay the same the stock price would rise $150 from $525 to $675. EBITDA per share would similarly surge almost 30% from $62 per share to nearly $80. In my mind, this would be a fantastic use of capital for shareholders at the current share price.

The company could also use its cash pile to make acquisitions. This is a less attractive idea to my mind because there aren’t many companies out there that are capable of generating the type of returns Apple is. Why buy a less attractive stock when buying back your own provides a better return? I can imagine the company making an acquisition outside their core business for strategic and competitive reasons but, frankly, I just don’t see Apple being that desperate. Their core business is firing on all cylinders and there’s no reason to buy new products when they’ve already got the best designers in the world.

All in all, I think that continuing to focus on their core competencies by continuing to strengthen and enhance their quality position in the marketplace and communicating to Wall Street that shareholder value is a priority would go a long way toward boosting Mr. Market’s appraisal of the company’s investment merits.

Chart of the Day

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Apple’s daily chart is starting to show an unorthodox head and shoulders bottom pattern. And while the stock price made new lows last month the oscillators made a positive divergence. If the pattern works, the stock price should go back to $700 over the next few months. Having said that there is a lot of congestion on the chart between $500 and $600 and some smart folks have predicted a stock price in the $400s. Stay tuned.

Hit the Links

  • Looks like Business Insider is killing it but why won’t Henry Blodget tell us how much they’re making? (paidContent)
  • Teens <3 Tumblr More Than Facebook (Fast Company)
  • Study: U.S. men’s life expectancy, 75.6 years, is the lowest among affluent countries. (WSJ)