Apple (AAPL), as arguably the most successful consumer products company ever seen, should logically be traded purely on fundamentals. What should matter is how many iGizmos they sold last quarter, how many they can be expected to sell in the next few quarters, and how much money they are going to make. It often seems, though, that those are the last things that actually drive the stock price. At a forward P/E of around 13.2 AAPL still looks cheap despite over 20% gains since mid-April, but conventional wisdom says that buyers should wait. The case for waiting is obvious and goes something like this...
Given the amount of rumor that surrounds Apple products it is little surprise that the stock price is often driven more by those rumors in the short term than by anything fundamental. In previous run ups to product launches it has been the ultimate “buy the rumor, sell the fact” stock and there is no reason this time should be any different. The anticipation of news is what really drives the stock. According to research by Walter Piecyk of BTIG research quoted in this New York Post article, Apple shares typically rise as the WWDC approaches and then fall during and after the conference.
This effect could well be exaggerated somewhat this time around as AAPL will split at close of business today. Holders of record will be entitled to 7 new Apple shares for each 1 old share. Conventional wisdom is that this will be beneficial to the stock as it becomes more accessible to “casual” investors. As always with AAPL though, the assumption that this will be the case has already contributed to the surge over the last 6 or 7 weeks. That, like any product announcement, is already priced in, so if anything it just adds to the likelihood of a significant drop in the share price over the next few weeks.
Add to that the relative proximity to the pivotal $700 level from which the stock collapsed in 2012 and you have a situation where buying now at these levels looks foolish. Any upward momentum will be slowed by nervous longs looking to sell on any sign of weakness.
These are all good reasons to expect AAPL to drop quite dramatically over the next couple of weeks. In reality, though, trading Apple stock over the last few years has been about being contrarian. When I suggested, back in August of 2012, that AAPL may have been overvalued as it roared toward $700 you would have thought that I had committed heresy. Similarly, when I perceived value in the stock below $500 I was seen as crazy.
If you look at the chart, it may appear that the contrarian position at this point would be to be bearish, but in reality the case for an imminent drop in the stock is so prevalent that it is actually going against conventional wisdom to remain bullish at these levels, and that isn’t a hard stance to justify. Apart from the aforementioned value based on the P/E there is also evidence that even the big boys are expecting a drop back in the next few weeks and have left themselves effectively short of the stock.
Morgan Stanley analyst Katy Huberty has pointed out, as reported here, that institutional ownership of AAPL stands at 2.2%, at the low end of the historical range and significantly underweight as compared to the 3.2% weighting the stock has in the S&P 500. Many would see this as a negative for the stock; I mean, all of the big firms obviously agree and are bearish, right? I learned a long time ago that when everybody agrees and are already positioned, taking the opposite view is the only thing to do. Any upward move will see a scramble to buy back, while any downward move will be limited as institutional ownership returns to the mean.
Technically, then, despite AAPL being on an upward trend, there is likely to be support for the stock, but what about fundamental prospects? Over the past couple of years we have become accustomed to Apple product launches being somewhat of a disappointment... No wearables, no larger screen, no real new products; nothing but tweaks. The indications from the company so far are that this year will be different.
I understand that there is a feeling that they would say that whatever, but enthusiasm about new products rather than updates to IOS and existing products has been noticeably absent since the Jobs era ended. There is no secret to this. Unlike the past few years, management is talking about actual products. At Re/Code last week, Senior Vice President Eddy Cue stated that “...later this year, we've got the best product pipeline that I've seen in my 25 years at Apple."
AAPL, it seems, is setting up to be a successful contrarian trade once again. The strange thing is that, in an unusual twist, the contrarian thing to do is to follow the trend and buy a stock that has gained over 20% in 6 weeks.