Shares of Apple (NASDAQ:AAPL) briefly past the $2 trillion market cap yesterday. AAPL stock traded at $468.65 to become the first U.S. stock to reach this epic milestone. Shares ultimately pulled back to close with a market cap of $1.98 trillion.
Much of the recent run-up is due to the announcement of a 4-1 stock split that will trade on a split-adjusted basis Aug. 31. Look for the red-hot rally in Apple to continue to cool as the split date nears.
In theory, stock splits should not add value to the stock. In reality, investors inevitably front run the split, which has certainly been the case for Apple stock. AAPL has added on nearly $80 points since the split announcement. It will likely be a case of buy the rumor/sell the news once Apple trades post-split.
This is even more true given that Apple stock is the most overvalued, overbought, and overextended it has been in quite some time.
AAPL Stock Is Overvalued
The current price-earnings ratio just past 35x and sits at the highest multiple in the past 10 years. Price-sales is at a mind-boggling 7.5x, also at by far the richest level in the last decade. Other traditional valuation metrics such as Price-Book and Price-Free Cash Flow are also flashing red. Apple stock had previously traded at a discount to the S&P 500 on a valuation comparative but has recently vaulted to a big premium.
The 35.2x P/E ratio is now well above the historically rich 29.x P/E ratio for the S&P 500. The 7.5x price-sales ratio dwarfs the 2.4x for the S&P — even though the S&P is trading at the highest multiple in the past 20 years!
These multiple extremes are even more incomprehensible given the fact that Apple is the largest stock in the U.S. There is no way Apple can grow anywhere close to the rate needed to justify these ridiculous multiples due to the law of large numbers. This will serve to staunch any further rally in AAPL stock.
Overbought
Source: The Thinkorswim® platform from TD Ameritrade
Apple stock is finally showing some weakness after getting to extremely overbought technical levels. MACD breached 5 before pulling back sharply. Momentum hit the highest levels of the past year before it dropped quickly. 9-day RSI is still overbought with a reading above 70, although it too has dropped from extremes over 80. Bollinger Percent B traded at the most euphoric levels in the prior 12 months as it hit 130 before receding to under 100.
AAPL stock is also trading at the largest premium to the 20-day moving average and the uptrend line since the latest rally began. More importantly, the stock traded higher yesterday before pulling back sharply to close nearly unchanged. This type of reversal pattern is many times a sign the buyers have become exhausted and the sellers are in control. It is even more powerful given the magnitude and length of the latest rally.
Overextended
Source: StockCharts.com
Normally Apple stock is highly correlated to the Invesco NASDAQ 100 ETF (NASDAQ:QQQ). This makes intuitive sense given that Apple has the largest weighting in the ETF at over 13%. The correlation has broken down considerably, however, over the past few months.
Apple has been a huge out-performer with the 80% gain since the COVID-19 crisis lows in March. It has doubled the very respectable 40% gains in the QQQs. Trees don’t grow to the sky forever, though. Look for Apple stock to begin to revert back to the mean. AAPL will likely be a relative under-performer over the coming months.
Investors should be wary of rushing in to buy AAPL stock at current levels. Instead, patience will likely be rewarded as a pullback likely looms. Option traders may want to consider selling some out-of-the money puts or put spreads to get paid now to be buyers at lower levels.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a weekly option and volatility newsletter can visit the Options and Volatility Newsletter website.
