Considering the Downside Prospects for Apple

For the New Low Observer team, it has been an uneventful period in our watch of Apple Inc. (AAPL) stock since February 5, 2012 even though the price has risen nearly 40%.  What in the world would we consider eventful in regards to Apple stock? Well, we’d  like to see Apple hit one of Edson Gould’s speed resistance line downside targets.  The chart below is an update of the one that we submitted earlier this year (found here).

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The new downside targets are as follows:

  • $424.15
  • $297.43
  • $212.08

Based on the current run in Apple Inc. stock, the Dow Theory fair value is $275.44. (636.23-85.35)/2=275.44

As we said on February 5, 2012, “the rampant enthusiasm for AAPL suggests that the stock isn't likely to decline to the indicated levels any time soon.” This has definitely been the case with the impressive run up since the beginning of the year.

In order to diffuse the legitimate claims that we’re grasping at straws simply to make a bearish case against Apple Inc., we’ve provided the price performance of the stock over a similar 7-year period from December 19, 2000 to December 31, 2007 applying Edson Gould's speed resistance lines, in the chart below.

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What stands out the most in the period from 2000-2007 is the percentage increase in Apple’s stock price compared to the current run-up as indicated below:

  • 12/19/2000-12/31/2007: +2,300.67%
  • 9/7/2005-4/13/2012: +1,079.56%

If we were to ask the question of what was the likelihood of Apple falling to $133.22 on December 31, 2007, we believe the chorus of Apple investors would say, “not likely, if ever.”  Similarly, we believe that, based on the current speed resistance lines, no one would expect Apple to decline to our conservative downside target of $424 let alone falling to the  $212.08 worst case price.

We’re not advocating that we’ve seen the peak in Apple’s stock price especially when we compare the fundamental data on AAPL between the 2007 peak and the current price:

Apple (AAPL) 2007 2012 % change
Sales per share 27.52 170.2 +518.45
‘‘Cash Flow’’ per share 4.37 46.5 +964.07
Earnings per share 3.93 43.8 +1,014.50
Div’ds Decl’d per share 0 2.65 N/A
Cap’l Spending per share 0.84 5.65 +572.62
Book Value per share 16.66 138.85 +733.43
Common Shs Outst’g 872.33 940 +7.76
P/E Ratio @ high price 43.53 17.23 -60.42
Source: Value Line Investment Survey Oct. 12, 2007 April 6, 2012

However, in 2007, it was justified for a non-dividend paying technology company to have a P/E ratio in the 40’s while a company that could easily become a dividend aristocrat would be considered fairly priced with a P/E ratio of 17.

Since we believe that markets are supremely inefficient, the perceived extremes to the upside are likely to be counteracted to the downside.  Edson Gould’s speed resistance lines provide a progressive downside target as Apple’s price increases.  If the price decline achieves any of the downside targets, we’ll be ready to re-examine the company fundamentals for long and short-term investment opportunities.

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