When Goldman Sachs talks, people tend to listen. Goldman’s analysts talked about Apple Inc. (AAPL) earlier this week when they upgrades the stock and added it to their “conviction buy list,” resulting in a surge of almost 5% so far for AAPL stock.
Their outlook is bright, forecasting that AAPL has more than 40% upside over the next few years as it has transitioned from a hardware company to services. But should you be convinced by Goldman’s perspective?
We’ll budge on the 40% upside within a few years as we would tend to agree that things are looking up for the technology sector as a whole, but two questions remain for us on AAPL now: First, are there better technology stocks for our portfolio? Second, is there downside risk before the stock goes up 40%?
AAPL Stock Analysis
Let’s start with the second question, to which the answer is absolutely “yes” — there is certainly downside risk.
Fundamentally, AAPL has seen some improvement … but not as much as you might think. Last quarter’s earnings came in 9 cents (4.8%) better than expectations. This earnings beat compares to an average over the last two years of 7.8%, so AAPL is still falling a little short on the earnings trend.
Revenue has been growing by a better than average margin, but the law of large numbers continues to argue against Apple moving that needle quickly. On the plus side, AAPL appears to be a relative value, trading with a price-to-earnings ratio around 13, compared to the S&P 500’s ratio of more than 21. Sum it all up and we would put Apple stock in our hold category at best right now.
The technical story for Apple stock is a little different right now. As is the case with roughly 60% of the S&P 500, shares are trading below AAPL stock’s 200-day moving average. In addition, the stock has been bouncing from its 20-month moving average, currently sitting at $111.90, which is a potential problem.
The 20-month trendline is often considered the line of demarcation between bull and bear market for stocks, including Apple stock. Think of it as the DMZ for stocks — it’s bad news as soon as you cross the line. So far, the last four months have seen the Apple stock price dip below this critical trendline to be met with technical buyers, but the volume of buying on these dips has been getting lighter, potentially setting the stage for a break lower.
Sentiment towards Apple stock is also a little more optimistic than we like. This suggests that the crowd is still a little too bullish on the stock for its own good. Lots of bulls equals lots of potential sellers if things turn down.
As an example, Apple shares are currently have “buy” recommendations from 76% of the analysts covering the stock. A stock price stumble or underwhelming outlook could cause some of these bulls to turn lukewarm on the stock and issue downgrades to hold, shifting the order balance to sellers.
We view Apple stock as more of a “trading” situation right now than a trending investment. We don’t expect to see Apple stock beat the market by a large margin over the next year. Those interested in buying Apple shares are likely to get an opportunity to purchase them at the $108 price level, and perhaps $100 if you’re particularly patient.
A Better Investment Than AAPL
Among the heaviest weighted companies within the Nasdaq 100 are a number opportunities that our models rank as better choices than Apple stock at this time.
One standout is Intel Corp. (INTC).
Intel stock is in a technically superior pattern as shares recently completed a “golden cross” pattern (50-day crossed above the 200-day), which is historically bullish. The company just announced an increase in its dividend and confirmed its earnings outlook.
Only 48% of the analysts covering it have it ranked a buy so there will be upgrades coming. Buy Intel here and wave at AAPL owners as you fly past.
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