Less than three months ago, Apple (NASDAQ:AAPL) stock was flying high. Shares hit new all-time highs thanks to a 32% rally following a summertime lull. All in all, Apple stock had rallied 75% in just 12 months, with the looming introduction of a new iPhone poised to fan those bullish flames further.
It was, for all intents and purposes, a perfect storm of revenue, earnings, euphoria and optimism.
Needless to say, the 25% slide since mid-September — including a quick flirtation with $500 — has surprised a lot of investors, as nothing of the sort was considered even remotely possible.
The big move lower — despite a very strong response to September’s debut of the iPhone 5 and solid demand for the iPad Mini — is now forcing Apple’s shareholders to ask questions. Like “What happened?” Or “Now what?”
There’s no way of denying Apple’s insane degree of success since the launch of the first iPhone back in 2007. Annual revenue has jumped from $24 billion then to what likely will be more than $160 billion in 2012. Earnings have grown accordingly, from $5 billion in 2007 to an expected $41 billion-plus this year. Yet AAPL still is priced more like a value stock than a growth stock, trading at a mere 11.9 times trailing earnings, and only 9.1 times its projected profit for 2013.
By all measures, Apple is about as close to perfect as a stock can be. The value is there. The growth is there. The longevity is there. So why, prey tell, was the stock allowed to tumble 25%, even in the shadow of success?
This is where the discussion turns philosophical.
To give credit where it’s due, Apple has produced stellar growth over the past five years, with a six-fold increase in earnings since 2007. In that regard, the stock’s near-400% return during that time makes sense. Make no mistake, though … during that five-year span, AAPL shares become less of a vehicle that reflects the underlying company’s value, and instead a story in and of themselves.
As long as these shares continued to basically trade in tandem with Apple’s growth, it wasn’t a big deal. Indeed, few were complaining about the disconnect during the first nine months of 2012, when the Apple rally went into overdrive. But such a disconnect will eventually present a problem, as it has now.
In simplest terms: Sentiment took over the stock’s price in late 2011/early 2012.
There are only two sentiments that matter in trading — fear and greed — and it was greed that dug in first, leading to extreme bullishness. Sentiment can be a funny, cyclical thing, though; the same market that insisted on only seeing the upside of Apple in early 2012 is now the same market that insists on only seeing Apple’s downside now.
Little has actually changed at Apple Inc. The stock’s volatility was mostly spurred by what was going in between investors’ ears.
The good news is, these sentiment disconnects are temporary. Now that a fear-and-greed cycle has run its course and traders are emotionally exhausted, Apple stock should reconnect with the corporation’s actual value. The question is: When and where?
The answer: Here and now.
Click to Enlarge As nasty as the downtrend has been, the worst-case scenario and maximum dose of fear probably has been baked in. The chart also has brushed a key Fibonacci retracement line at $499. A move to that level represents a key 61.8% retracement of the big rally that began back in late 2011 when greed took over.
Point being, there’s just not much left to technically give up here, particularly given how Apple is still on a performance roll.
While it’s true that Apple doesn’t have much variety on its menu of products, it’s also true that it doesn’t need much variety — the iPhone and the iPad are their respective category leaders. The company’s new products, like the new iPad Mini, are even starting to cannibalize existing products. It doesn’t matter. Between existing customers as well as the new round of fans that are added to the Apple army each time it unveils a new product, the company can grow at will. Next year’s per-share profit of $49.27 is a totally plausible outlook.
All that being said, the best reason of all to step into Apple now might be that the analyst community has finally started to hate the company.
Within the past week, five analytical firms have cut their price targets on Apple stock. Citigroup (NYSE:C) downgraded the stock to “neutral.” The media has started to hammer AAPL, too, in unison rather than individually. It’s all superficially a problem for the stock, which is why it’s also a proverbial green light for would-be buyers.
In simplest terms, analysts are notoriously late to the party. The media usually doesn’t harp on a story or idea until that story is so old and tired that it’s irrelevant. It’s a contrarian view, to be sure, but the approach works more often than not.
Bottom line: The worst is over for Apple, and the 25% dip is a buy-worthy one. $600 is a more likely target than $400 from here.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.