Apple (NASDAQ:AAPL) recently reported strong quarterly results in January. However, Apple stock did not respond with a robust rally. At least, not in the way that investors were hoping for.
I am a long-time bull, and Apple is one of the few positions that’s earned a “set it and forget it” label; More commonly known as buy and hold. Every once in awhile, though, I will trade around the name — as either the selloffs become too extreme or the rallies are too much.
Overall, I like to take advantage by buying or selling in each respective case.
The current rally, stemming all the way back from the lows in January 2019, feels like too much to me. From the January 2019 lows to the recent high, Apple stock has rallied about 125%.
If that feels too cherry-picked, then how about the 83% rally from the May low? Or the 66% rally from the August low? These are some seriously big numbers, particularly for a company that boasts a $1.4 trillion market cap.
Valuing Apple Stock
Keep in mind, I really like Apple as a business. And I’ve believed for a long time that it deserved a higher valuation thanks to the growth in its wearables business — like the Apple Watch and AirPods — as well as its robust Services unit.
The company has built itself into an impressive unit, but at what point is all of that baked into the share price? It’s not as if the iPhone is a recent invention, and the AirPods business isn’t suddenly worth $500 million in market cap.
Overall, it begs the question of: If this rally has gone on for too long, then when is Apple a buy? Or, if you’re not looking to get back in after a recent sale and instead looking to initiate a new position, where should that be done?
The big hype for Apple stock is the coming 5G iPhone later this year. But while we wait for that, the latest iPhone unit is doing considerably well with its sales. So well, in fact, that Apple just smashed its fiscal first-quarter earnings and revenue expectations and provided significantly better-than-expected Q2 guidance.
For the year, analysts expect Apple to earn $13.89 per share on revenue of $285.43 billion. If the company generates in line results, this will represent growth of 16.8% and 9.7%, respectively. Those are pretty solid numbers for a $1.4 trillion company. However, is it worth Apple stock’s 25 times earnings?
According to the market, the answer — for now — is yes.
Over the last decade, Apple stock has tended to top out around 20 times earnings and bottom around 10 times. One could argue that it’s now worth a higher valuation — I agree — but what would a pullback to 20 times earnings look like?
That would land AAPL stock at $268 per share, down about 18% from the current high I don’t know if we get that type of pullback, but if we do, I think it would be a really reasonable “buy-the-dip” opportunity for investors.
Trading Apple Stock
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Do the charts point to an 18% correction? With an uptrend like this, they don’t. At least until the stock breaks below some of key trends and moving averages. However, I would note that the charts are losing some momentum.
In the fourth quarter, there were just three tests of the 20-day moving average. That said, we’ve since seen four tests of the 20-day in less than two weeks. In two of those instances, AAPL stock actually closed below it versus impressively rallying off this level like it did in Q4.
Another observation? Apple stock failed to take out the January high this month, all while the major U.S. stock indices were hitting new highs.
However, its short-term uptrend support (thin blue line) is still intact, as is the 20-day. Below both of these puts the $300 level and 50-day moving average on the table.
To get that 18% correction we mentioned, that puts shares down to $268. That price is about where the 100-day moving average is now, and a bit above Apple stock’s long-term uptrend support mark.
Remember, we don’t have to get an 18% correction. It may be an 8% correction (down to $301) or a 12% correction to ($288). However, be open to the possibility that Apple stock can and will eventually decline — particularly after such a robust rally over the past year.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL.
