SELL Facebook and BUY Apple?

In Wednesday stock market action, shares of Apple are up 1.83% at $573.15 per share, as the S&P 500 and Nasdaq are both rising today. Meanwhile, shares of Facebook have set a new low of $25.52 today and are currently bouncing back at $26.40 per share.

Being the world’s largest publicly traded company by market value, Apple Inc. (NASDAQ:AAPL) receives a fair amount of attention and criticism. Some discredit the tech giant by saying that past major players such as Microsoft Corp. (NASDAQ:MSFT), Research in Motion (NASDAQ:RIMM) and Nokia (NYSE:NOK) have fallen as market leaders and Apple’s fate will eventually be the same. Others question Apple’s ability to provide and infinite amount revolutionary products to the marketplace. However, hedge fund manager David Einhorn recently responded to critics and called Apple “one of the most misunderstood stocks in the market.”

In his quarterly performance letter to investors, the Greenlight Capital founder highlighted Apple as a prime example of a stock that received a boost in the first-quarter due to the market mispricing its growth rates. Einhorn writes, “None of our long portfolio investments have recovered with as much fanfare as AAPL, which surged from $405 to $600 per share in the quarter, bringing its P/E back to where it was at the end of 2010. Yet not everyone agrees that AAPL’s stock price is merely playing catch-up to its fundamentals.”

Even though Apple shares hit an all-time high of $644 on April 10, they declined to as low as $522 on May 18. This intra-day low corresponded with Facebook’s (NASDAQ:FB) first trading day on the Nasdaq. Apple’s stumble into Facebook’s debut caused it to be labeled as an ATM for hedge funds and raised concerns that perhaps too many hedge funds hold Apple. Einhorn takes issue with this claim by writing, “Collectively, hedge funds currently hold less than 5 percent of AAPL’s outstanding shares, and no hedge fund ranks among the top 40 holders of the stock. The average hedge fund has less than 2 percent of its equity assets in AAPL versus AAPL’s 4 percent weighting in the S&P 500, which means hedge funds are actually underweight AAPL.”

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One of the major misunderstandings that Einhorn responds to involves Apple’s products. Despite the tech giant having a stellar product line, it is actually a software company that receives value from customers craving products that contain iOS, the App store, iTunes and iCloud. “A consumer with one AAPL product tends to want more AAPL products. Once the user has a second device, AAPL has captured the customer. At that point, a future competitor has to make a product that isn’t just a little better, but a lot better to get people to switch. The high switching cost makes AAPL’s business much more defensible than that of its predecessors,” Einhorn explains.

According to CNBC’s All-America Economic Survey in March, half of all households in the United States own at least one Apple product. Furthermore, homes that own at least one Apple product own an average of three. Overall, the average household has 1.6 Apple devices. One-in-10 homes that do not currently own an iProduct, plan on purchasing one next year.

Einhorn concludes his Apple defense by writing, “We continue to hold AAPL. Not only do we think the skeptics are misguided, we believe the shares remain cheap. AAPL trades at a lower multiple than the average company in the S&P 500. A below-market multiple implies that this is a below-average company. We have a hard time seeing how anyone ranks AAPL as below average.”

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