Over $1 Trillion, It Is Time to Short Apple Stock

AAPL is looking overvalued, overbought and overloved at current prices

Shares of Apple (NASDAQ:AAPL) have been star performers lately. Apple stock is back above the $1 trillion market cap level and is within shouting distance of the all-time highs. The buzz from the Apple event on Sept. 10 is beginning to wear off though. AAPL has struggled to break out over the past few weeks. Look for the shine to come off Apple over the coming month.

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Apple is getting to overvalued levels from a fundamental perspective. AAPL stock now sports a trailing price-to-earnings ratio of 19.2, the highest level since 2009. It is also well above the five-year average of 15.4.

Other valuation metrics, such as price/sales, price/book and price/cash flow, are also at extremes. The dividend yield of just 1.4 is now well below that of the S&P 500. AAPL is no longer a value stock at these levels.

Nomura analyst Jeffrey Kvaal also believes that Apple stock is at unreasonable levels, even though he did boost his price target from $185 to $205. Valuation was the main driver of his concerns. The average analyst price target for Apple is just $224.48 according to TipRanks. This is actually below the Oct. 7 closing price of $227.06 for AAPL stock. This should serve to dampen any major upside from here.

Apple Stock Technical Chart

Apple stock is getting overbought on a technical basis. The five-day relative strength index is nearing 70 while Bollinger Percent B breached 100. AAPL is also trading well above the 20-day moving average. There is major resistance at the $227 level as well. It is interesting that moving average convergence/divergence is languishing even though Apple has been ripping higher. This divergence is another bearish indicator.

The latest rally in Apple stock is now almost identical in nature to the previous rally, as seen in the chart. This prior rally was followed by a subsequent sharp pullback in Apple. I look for  a similar scenario to ensue shortly.

Apple has been a huge outperformer to the other mega-cap stocks over the past four months according to Bespoke Investment Group. AAPL stock has more than doubled the performance of Microsoft (NASDAQ:MSFT) and is up four times more than the S&P 500 in that time frame. This divergence will eventually converge with AAPL stock being a relative underperformer.

In my previous analysis on Apple stock from Aug. 15, I had a bullish opinion with Apple trading near $200. The attractive fundamentals and technicals pointed to a higher price at that time. Now that AAPL stock has rallied 12%, my opinion as changed as well. Price does ultimately matter. The fundamentals and technicals have turned from bullish to bearish, so my outlook has changed in kind.

How to Trade AAPL

Stock traders can look to short AAPL near current levels with an initial downside price target when Apple stock reaches the uptrend line — currently around $218. A meaningful breakout to fresh all time highs would be a viable stop out level. Apple goes ex-dividend in early November. Anyone who shorts the stock at that time would be liable for the dividend, currently 77 cents. It is also important to remember that earnings are due Oct. 30.

Option traders may want to consider going long the Oct $225/$220 bear put spread for $1.70. Maximum risk on the trade is $170 per spread with maximum potential gain of $330 per spread if AAPL is below $220 at October expiration. Return on risk is 194%. These options expire on Oct. 18 and thus avoid any earnings related risk.

Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go here.


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