Apple Stock Thrashed by Bear but Is An End In Sight?

At Friday’s (Mar 1 2013) close anyone who bought Apple Stock in the past 12 months and has held on, is now holding losses. Apple Stock isn’t really in a free-fall but it certainly feels like it to millions of investors. Those who have followed my biweekly Put Selling know that I was holding the $430 and $425 puts which expire today. I was surprised when Apple Stock plunged all the way to $430.00 as materially there is no change in Apple Corp yet.

Some of this decline could be the result of the rumor of a stock split which pushed up the stock earlier this week and perhaps when it wasn’t announced investors became worried and decided enough was enough and sold out. However I think there is a lot more happening here which I want to discuss in this article.

Apple Stock And Its Bear Market

When Steven Jobs passed away there were many analysts who discussed whether the loss of his visionary outlook might hurt Apple’s future potential. Yet just as many analysts doubted that and if you look at the analysts who follow Apple Stock today, overwhelmingly they have Apple Stock rated a buy and a strong buy. Of the 53 analysts presently listed as following the stock at TD Waterhouse Brokerage only 2 have it rated as an under perform and 1 as an outright sell. Of the remaining 50, a full 28 have it rated as a strong buy.

Meanwhile Standard and Poor’s has it rated a strong buy with its highest rating. They have a 12 month target price of $600.00. They indicate that they believe Apple’s growth will exceed its peers and they estimate revenue growth of 14% for 2013.

Overall I think the analysts are wrong with Apple Stock which I will get into in a moment.

Bear Grabs Apple Stock

It what has been a very typical bear market pattern, when Apple Stock spiked at just above $700, the stock has been in a collapse ever since. Now down 38% Apple Stock has wiped out all earnings from the year and broken through a variety of support levels.

Apple Stock 12 month daily chart

Apple Stock 12 month daily chart

Apple Stock Support Levels

If we go back to the chart I posted in November 2012 I had marked the 5 levels of support as Apple stock climbed and then had started its decline back down.  You can see the various support levels in Apple Stock below. Each one of these except for one has been broken. Back in November a lot of investors had written me wondering how it could be that Apple Stock if it broke support at $516, could fall all the way to $418 before the next support level. The answer was simple – volume of buyers and sellers supported the stock at $418 but there was little above average volume until the stock reached $516.

Apple Stock Support Levels

Apple Stock Support Levels

Now that Apple Stock has broken all the levels of support it is trying to find a bottom but I still think the bottom is below even the $418.00 support.

All through the recent decline I have sold puts at and below support levels staying ahead of the decline in Apple Stock. Friday’s action was definitely bearish but there is probably a lot more going on here than the lack of a stock split or lack of one time cash payout to shareholders.

Apple Stock CEO Tim Cook

On Wednesday CEO Tim Cook made a couple of comments which the media picked up on and ran with. The first was Cook commented on not liking the stock price levels of Apple Stock. This is rare for a CEO of most companies and the media picked up on it as a sign of trouble ahead.

The second was his comment that covered nothing of any substance on new products. Cook’s words quoted in the media were “Obviously we’re looking at new categories — we don’t talk about them, but we’re looking at them.”  The media picked up on Cook’s comment which he mentioned twice. This was far different from his excited rant last quarter about TV and how Apple had an intense interest in this medium.  He comments this quarter got media outlets discussing how obviously any new products would not be coming soon.

It’s tough in today’s social and media connected world but obviously a CEO has to be careful what he says or infers. The media ran with both of these stories and by Thursday shareholders could read it in every media outlet and now you are reading on FullyInformed.com. See how fast these kinds of things spread! By Friday anyone who was concerned was busy selling.

Apple Products Shrinking Margins

I think there is more here though. Apple’s always had a terrific profit margin on its products, like Microsoft. Recently though Apple reduced the price of their Mac laptops. As well the cheaper and smaller iPad mini is outselling the iPad 4. Price has always been an issue for consumers but many always appeared willing to pay more for Apple products. That trend is starting to crack and this means lower profit margins.

Apple Stock Buyers – From Speculators To Value Investors

Another factor that may be impacting Apple Stock is who the buyers of the stock are. For a long time Apple Stock has been the haven of traders and speculators. This type of investor can drive up or down the price of an asset quickly. Often they are basically gambling on the earnings momentum, cool or wow factor and the investor sentiment to make buying and selling decisions.

The collapse of the stock may have driven out a lot of this type of investor and the advent of the dividend payout and the collapse of the stock itself may be bringing in “value oriented” investors.

Value oriented investors look at a stock far differently. They want to buy a stock cheaply and they want to see those dividends increased annually. They want to see annual earnings growth and they do not like surprises in any front, earnings, products, management, advertising, any type of surprise.

Apple Stock has $137 billion in cash so dividend payouts could continue for a very long time and while the stock is presently trading at 9.8X PE, 8X PE would be far more attractive as that would put the stock down around $350.00 and the dividend of $10.60 would yield 3%, that magical number that a lot of dividend investors look for.

$350 on Apple Stock

What’s the chance the stock could get this low? Actually the odds are good that this is where Apple Stock is heading. The next three support levels in Apple Stock are clearly $380, $350 and $260 with smaller support at $400 once $418 breaks and very little support around $300 to $325, but little.

Apple Stock Chart 3

Apple Stock 2010 to 2013 daily chart

Another stock that ended up in the same pattern as Apple Stock was Microsoft Stock. In the years leading up to the great tech bubble burst Microsoft Stock was the darling of traders as the stock split four times before 1999 and then one more time in 2003. Since then Microsoft Stock has become a dividend play. Today it acts more like a utility stock than a tech stock.

Microsoft Stock

Microsoft Stock 1996 to 2013

This could be the ultimate future of Apple Stock to become another dividend paying tech stock that has a solid customer base, turns out a variety of “cool” products but instead becomes more a utility than a tech stock. Is this actually possible?

Apple Stock A Utility Stock?

That’s a tough call because Microsoft has a virtual monopoly in a number of key tech sectors including their operating system, office product, Xbox and server software. Apple Stock has iPhone customers, iPod and iPad and a small number of Mac customers.

So consider then that their iPhone market is being assaulted on all sides, the iPod market has not really grown, the Mac Laptop market is declining and the iPad market is being shrunk by their own iPad mini market and you can begin to see that aside from $137 billion in cash Apple has a lot of work cut out for them to keep growing their customer base. Without growth in that base their earnings will continue to decline along with their stock price. So can Apple Stock begin to trade like a utility stock? I don’t see how unless they develop a product that is in wide use and growing slightly every year just like most of Microsoft’s products.

Apple Stock and Options Strategies

I believe Apple Stock can be safely traded through strategies such as my Biweekly Put Selling strategy but I think investors need to stay cautious and spread their risk out staying within support levels and not taking chances in Apple stock. For investors who own this stock above where it is presently trading I believe they should turn to option strategies to assist in reducing their cost basis and move any capital caught in this decline, back into a profitable position. This will insure that if Apple Stock continues to decline, which it certainly appears will happen, investors are in a position to continue to profit no matter which way Apple Stock should move in the near future.

Apple Stock Internal Links

Apple Stock

Split Information

Split Information

Apple Stock External Links

Split InformationSplit Information

Split Information Split Information

Split Information Split Information

  • Hanksterr

    Great analysis, and you are probably right.
    What AAPL needs is a stimulus like a stock split.
    Can you imagine the number of people who would like to own AAPL forever but its just too high now but would buy it on a 3 or 4 split.
    Yes, I understand the split adds no value, but it sure creates a better atmosphere than we have now.

  • Thanks Hank.
    It’s been a while since I heard from you. I appreciate your comments on Apple Stock. A catalyst would be nice at this point but overall I think earnings need to show improvement and surprise to the upside.
    Teddi