By Martin Tillier
On August 29th, I wrote an article suggesting that AAPL may be about to fall. While there were some fundamental reasons for that view, the most compelling reason to me was that it seemed everybody was increasingly bullish. Then, a couple of weeks ago, I wrote that the mood was beginning to change. Then in what appeared to be scorn, reviewers of both the stock and the products moved from unquestioning adoration to nit picking and criticism, seemingly overnight. Articles such as this have started to appear on non-financial sites. Everywhere you go it seems people have moved from ridiculous predictions for the top of AAPL stock to equally ridiculous predictions for the bottom.
It’s time to be contrarian again.
I made a living for most of my life by understanding the mentality of traders. They, like sports talk radio hosts, are professional over-reactors. Just as one loss and a public locker room dispute doesn’t change the teams true talent, neither does one quarter of “disappointing” earnings, poor revenue growth or the departure of a couple of executives mean that they are now an ailing company. Much revenue shortfall would seem to be due to supply constraints that I mentioned in August. The opinion of some insiders seems to be divided as to whether Scott Forstall was an essential visionary or a divisive figure. Opinion on John Browett is less conflicted. He can be seen as more of a Bobby Valentine; a talented manager who tried to change an established culture, and made himself unpopular in the process. His fast turnaround is an embarrassment for Tim Cook, but I’d rather see a CEO admit mistakes than persevere to save face.
Quite simply, despite, or maybe because of, all of the noise, the stock looks oversold. Forward P/Es can be deceptive as they, by definition, have some growth expectations baked in, but when that P/E number is under 11 for a proven generator of massive profits it would seem to be a good time to buy.
From a trader’s perspective AAPL below $550 looks like a buy on the chart too. There is a logical stop-loss point just below the May and March lows of $522.18 and $516.22 respectively; somewhere around $511 would make sense. The upside target is a re-test of $700, giving a decent risk reward ratio to the trade. The stock has dropped over 20% since I wrote my bearish article and around 24% from the high, making the correction look overdone.
There would seem to be several good reasons to turn around and buy AAPL now, but the simple fact that, as those reasons are whispering “buy” in one ear, most commentators are screaming “SELL” in the other may be the best of all. In my experience, contrarians make few friends when they oppose prevailing sentiment. They do, on the other hand, often make money.