Apple (NASDAQ:AAPL) shares just closed out a banner year by rising 86% for 2019. The euphoria pushed into the first trading day of 2020, propelling AAPL stock north of $300. With the wind at its back and a seemingly unstoppable trend in place, you might wonder why anyone wouldn’t buy the tech titan right now.
I can think of two reasons that should give would-be buyers pause.
Sky-High Valuations for AAPL Stock
One of the most commonly followed metrics among the fundamental analysis crowd is the price-to-earnings ratio. It compares a company’s stock price to its earnings per share and is designed to reflect valuation. Essentially, it tells you if you’re buying when shares are undervalued or overvalued.
Given last year’s meteoric rise, AAPL stock is now perched near $300. Unfortunately, earnings growth hasn’t been near as rosy. With its trailing twelve-month earnings at $11.89, AAPL now boasts a P/E ratio of 25 — its highest reading of the decade. It’s impossible to make the case that you’re getting a bargain on AAPL shares here. From a fundamental perspective, you’re paying a higher price than at any time over the past ten years.
That should temper your enthusiasm for chasing the stock. At a minimum, given the princely sum required to buy now, you must lower your expected returns.
This isn’t to say that AAPL can’t keep rising. Perhaps earnings do grow enough this year to at least partially justify 2019’s rocket-like rise. As trading veterans know, price is a forward-looking metric, often rising in anticipation of improving earnings or sales growth. I suspect, however, that price has set the bar higher than earnings growth can attain.
Bottom line: don’t expect 2020 to be as smooth a road as 2019 for AAPL.
A Technical Take
AAPL stock’s price chart is a thing of beauty in the daily time frame. But the stretched nature of the weekly view should give buyers pause. It’s overbought … way overbought. While that doesn’t mean a top is imminent, it does mean the risk-reward for new entries is skewed against buyers.
The accompanying weekly chart shows the 50-period moving average in green. Consider that a good proxy for the “mean” that Apple stock tends to revert to over time. Now, note how far away we have ventured from it. The lower panel in the chart better quantifies the visual, displaying the percentage difference between the 50 MA and price. Apple stock has risen 37% above the moving average, which is a level touched only twice in the past decade.
In both prior episodes, Apple wasn’t able to rise much further without a pause or pullback developing. I suspect a similar outcome could be looming this time.
Despite today’s cautionary comments, I’m not bold enough to suggest a bearish trade. There are easier ways to make money than trying to pick tops on the strongest stocks in the market. If you’re already long the stock, consider buying puts or tightening stops to lock-in gains. If you’re looking to get in now, consider scaling-in over going all-in. That means buying some now but waiting to buy the rest of your position at lower prices.
As of this writing, Tyler Craig held bearish options positions in AAPL. For a free trial to the best trading community on the planet and Tyler’s current home, click here!