Apple Inc. (AAPL) Is Overdue for a Pullback, But Upside Remains Great

Apple, Inc. (NASDAQ:AAPL) is a stock I’ve been bullish on for a long time, and my outlook hasn’t changed in either the short or long term. AAPL stock has been incredibly strong recently (as has the overall market) and a healthy pullback in the next week or two is certainly a possibility.

Apple stock gained 10% through all of 2016, and in just the seven weeks so far in 2017 it is already up nearly 17%. In addition, the relative strength index (RSI, located at the bottom of the chart below) is up to 93, which is the highest it’s been in a year. Of course, a stock can continue to rally even with an elevated RSI, but there’s no question the odds of a pullback are becoming higher.

Apple Inc. (AAPL) Is Overdue for a Pullback, But Upside Remains Great

Apple has initial support at the old all-time high of $134.54, but given AAPL stock’s recent climb, it’s more realistic to expect a slightly larger dip. That would put the next level of support at the upper end of the large gap AAPL left after earnings in early February. If it gets anywhere close to that $127 area, which would represent a healthy 6% pullback from current prices, it would be considered a great buying opportunity.

Bottom Line on Apple Stock

From a fundamental perspective, Apple remains the largest company in the world, but it is also very undervalued right now. AAPL stock currently trades with a forward P/E of approximately 15, which is below the 17.5 P/E the S&P 500 garners today.

Also, keep in mind that the company should grow earnings at least as quickly as the index. Adding in Apple’s intangibles and the cult-like following it continues to have around the world, there’s no question it should have a valuation above that of the market. If AAPL stock were to trade at the S&P’s valuation of 17.5x 2017 EPS estimates, share prices would be up around $156.27.

Looking ahead, I believe Apple will report much better 2017 earnings than Wall Street expects, and I think $175 is a more reasonable price target over the next 12 months. That’s a long way up from the price of Apple stock today, so I’d be looking to build a position on a healthy pullback.

Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks and the ETF Bulletin. Earlier this year, Matt and Hilary Kramer teamed up on Breakout Stocks where Matt serves as the Co-Editor. Most recently, Matt and Hilary joined forces again. This time, they are helping individual investors make money trading ETFs. For more on their latest project, visit www.etfedgesummit.com.


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