How Bruised Is This Fruit?

by Johnson Research Group | January 30, 2013 8:42 am

Apple (NASDAQ:AAPL[1]) just announced that it would be releasing yet another new iPad — this one will boast an enlarged memory of 128 gigabytes and have a retail selling price of $799 for the Wi-Fi version and $929 for the LTE model. Outside of the bumped-up memory, Everything else about Apple’s tablet is the same, including the dual-core A6X processor, 2 gigabytes of RAM, and 10 hours of battery life.

So, outside of being able to store more movies or songs … what’s the big deal?

AAPL is starting to feel like the company it was in the early 2000s when a simple redux of the iPod was enough to give somewhat of a short-term boost to the shares, but nothing lasting. There’s a huge difference between now and then, however, that could be the Achilles heel for shares prices over the intermediate-term outlook: “The Crowd.”

Remember the quagmire that Microsoft (NASDAQ:MSFT[2]) found itself in from 2002 until, well … now? The lack of performance of MSFT shares for the last decade or so can be traced back to a deadly combination of the stock being the poster child of crowded trades and a lack of product innovation, as its product pipeline consisted merely of iterations of the Windows operating system.

According to our historical analyst recommendations data, MSFT shares were ranked a “buy” by almost 96% of the analysts covering the stock at the beginning of 2004. In comparison, only 8% of the analysts covering AAPL shares had it in the same category at the same time. Over the following year, AAPL shares returned better than 200% while MSFT lost 2%. To put things into perspective, the Nasdaq returned 8.5% in that time.

Now, Apple finds itself in the same treacherous situation as MSFT about 10 years ago. A potential slowdown in innovations (true innovation, not iterations of the iProducts) is combining with the extremely overloved status of the stock to create what is likely to be another quagmire for technology investors. As it stands today, despite its months-long plunge, AAPL still is recommended a “buy” from 88% of the analysts covering it — making it one of two of the most recommended stock in the Nasdaq-100 Index (NASDAQ:QQQ[3]). The other overloved stock: Qualcomm (NASDAQ:QCOM[4]).

Click to Enlarge Historical trends suggest that the next round of selling will come from the pending price and recommendation downgrades as the analysts covering the stock begin to pare their exposure to this juggernaut. The downgrades, of course, will cause AAPL shares to dip even further.

For now, we are likely to see a price of $400 act as a tractor beam for Apple stock as traders will continue to take opportunities to sell into strength, causing additional pressure on the shares.

We’ll expect to see further long-term underperformance from the shares until the crowd has capitulated from their uber-bullish views. Remember, the best time to buy into the market or a stock is when the rest of the market is selling. So far, we’ve not seen that capitulation moment on AAPL.

Of course, if you’re looking for a few tech stocks that aren’t crowded and outperforming, how about these two:

Netflix

Click to Enlarge With only 17% buy recommendations from the analysts, Netflix (NASDAQ:NFLX[5]) is positioned to benefit from upgrades after blowing analyst recommendations away on its last earnings report.

The shorts have provided a lot of the recent spike in the shares’ price as they were squeezed out of their bearish positions. The next round of buying will come as the analyst community starts to get on board with NFLX’s improving outlook.

Yahoo

Click to Enlarge Yahoo (NASDAQ:YHOO[6]) has been a textbook example of using sentiment to determine when to buy or sell a stock. YHOO shares topped out in December 2005; care to guess when the stock was overloved based on the analyst rank? October 2005, just before the top!

Currently, only 28% of the analysts ranking the stock have it at a “buy,” despite the fact that the shares are outpacing the market. This will garner the attention and upgrades of the analyst community, helping shares progress higher.

As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/01/how-bruised-is-this-fruit-aapl/

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