ANALYST WATCH: Apple's revival continues; Verity takes its medicine

Raise your hand if you thought Apple Computer Inc. (Nasdaq: AAPL) would be trading above $100 back in March when the stock was trading at $32 a share. Now, how many of you believe it will be at $200 by this time next year?

Amazingly, Apple has become perhaps the best-performing PC stock of the year. After the dark ages of 1995 and 1996 when it posted a $1 billion loss in four quarters, Apple's fought back to prominence on Main Street and Wall Street.

In the past two weeks, Apple's stock price has made some wild swings, as much as $6 or $7 a share in either direction in one trading day. Such volatility would be expected of an Internet stock, not a PC manufacturer.

"It's a little bit of profit taking after an extremely strong run-up in the last year," said Louis Mazzucchelli, an analyst at Gerard Klauer Mattison. "But we're seeing people come back and buy just as quickly. Apple's got a great story right now."

In its latest quarter, Apple posted a profit of $90 million, or 51 cents a share, on sales of $1.34 billion.

That beat reduced analysts' estimates after Apple warned in mid-September that it couldn't ship enough G4 Power Macs because of chip shortages from Motorola Inc. (NYSE: MOT).

Still, brokerage firms didn't hesitate to upgrade the stock and set higher 12-month price targets, especially since Apple exited the fourth quarter with a backlog of more than $700 million. That should be enough to boost first-quarter sales by 20 percent to 25 percent, according to CFO Fred Anderson.

Bear Stearns in November raised its 12-month price target from $90 to $95 a share to $115 to $120 a share.

The higher price target was based in part on the brokerage's "increased confidence in the company's near-term outlook," and "incremental upside from an Internet strategy expected to be unveiled in the next few months," according to a press release.

First Call consensus expects Apple to return a profit of 89 cents a share in its first quarter and $3.18 a share in the fiscal year.

If it were to beat that lofty estimate in its first quarter, expect those price targets to be raised even higher.

Verity gets crash course in expectations

To blame Verity Inc. (Nasdaq: VRTY) for its Titantic-like collapse this week would be easy and probably justified. But the analysts' following the Web search software developer should share in the blame.

Verity shares were essentially cut in half this week after it missed analysts' estimates by 3 cents a share in its second quarter, earning 9 cents a share on sales of $16.7 million.

The stock quickly plummeted to from 49 to 26 1/4 before rebounding to around 33 Friday.

Verity said revenues were light because it was unable to seal three large deals during the quarter, with two delayed into the third quarter. The company said it was "aggressively working and expects to close" the third deal.

Granted, Verity had talked itself up in the past couple of quarters. The stock surged from $10 a share last December to more than $60 a share in November.

But once the bad news came out, Banc of America and Dain Rauscher Wessels downgraded the stock. Both said the revenue was far short of the $21.5 million expected by both analysts.

BofA's Greg Vogel said Verity is a "fair" value at $26 a share.

But why didn't Vogel change his rating to a "market perform" or "neutral" rating before the earnings miss?

He didn't hesitate to cut the stock from a "buy" recommendation to "market perform" the day after

"We would be a buyer below this ($26 a share) level,'' he said in a research note. "Verity is not a fundamentally flawed business. The company has market leadership and is very likely to recover, in our opinion."

If you're confused, you're not alone.

Attention analysts: If you really believe a stock is valued at a price far below its current trading level, how about changing your rating before things go awry. You might save investors some money for once.