Last April was the last time I commented on Apple’s stock. It was at a point where it had gotten overdone and I said that it would drop $200 per share.
Well, it ended up dropping $100 per share. So I was right in there being a very significant drop. So I’m happy by calling a drop even though I thought it would be a $200 drop.
But after that drop was over, the excesses were wrung out of the stock and it was primed to head higher once again, because after all it does have great fundamentals.
Well, now I see Apple back in the same boat. It hit $700 per share in September and has been falling ever since.
The Relative Strength Index and moving average convergence-divergence are diverging, which shows weakness in the stock. As I’m writing this, Apple is trading in the $530s. But I feel like it will shed another $100 per share before the drop is complete.
The share price could easily go to $400-$430 before it finds any notable support.
You see, corrections lower tend to unfold in three distinct waves that Elliotticians call an A-B-C correction. Well, we’ve seen two of those waves pass, but we’re just getting started on the final leg down.
The first leg down was the drop from $700 per share down to $500 per share. The second wave involved a bit of a rebound. That’s where Apple bounced higher from around $500 per share up to $600 per share.
But now we’re in the final wave of the correction (wave C), and that one tends to be the longest wave more times than not. So if that ends up holding true in this case, then we’ll still see a sizable drop from here before the selling is finally over.
Additionally, Apple’s stock can’t seem to sustain a move above its 50- and 200-day moving averages, which are about to cross over downward. This is another bearish sign for Apple right now.
So I wouldn’t be quick to buy Apple until that drop is over. But once it is, Apple will be a great buy once again.
I know some people are writing Apple off at this point, but I believe that’s an incorrect view to take at this point. Why? Because this $500 billion company trades at a trailing price-earnings (P/E) ratio of 12 and a forward P/E in the 9s. So it’s already beginning to get cheap fundamentally again.
But just because a company gets cheap fundamentally doesn’t mean it starts to instantly turn around to the upside. And I don’t think that will happen this time either.
So if I’m right about Apple dropping into the low $400s, then it’s going to be at a fundamental value to salivate over.
This is still a solid company. That hasn’t changed. So I don’t believe the long-term trend will change yet either. We’ve just got to see this drop cease and then it will be worth picking up again.
So the good news is that if you missed the run-up in Apple before, I believe you’re going to get another great opportunity within the next 30 to 60 days. Stocks drop faster than they rise. So there will be even more value created quite quickly and it will be worth picking up.
You see, Apple still has a profit margin of 26.67 percent and an operating margin of 35.30 percent. So it’s still making money and its profit margins are still there.
The return on assets is at a very respectable 23.61 percent, and the return on equity is a whopping 42.84 percent. Warren Buffett would be proud!
The company had $58.52 billion dollars in earnings before interest, taxes, deductions and amortization last year. And it has over $29 billion dollars of cash on its balance sheet.
So this is not the state of affairs for a company that is “done for.” On the contrary, Apple just needed a sizable pullback because everyone had rushed into the stock and all that were going to buy had already bought. When the buyers dried up, the stock plummeted.
Additionally, Apple is getting caught in some year-end selling. It’s been one of the best performers, and mutual funds, pension funds and hedge funds want to lock-in those gains for the year.
Once the drop has run its course though, you’ll see fresh money come back into this stock. After all, where else are you going to find such great fundamentals? Those companies are out there, but they are few in number. So the money will pour back into Apple’s stock, but not before a sizable drop still unfolds.
So sit on your hands a bit longer and wait for this selling to dry up, and then Apple will be at a value that hasn’t been seen in a while. It will then be worth picking up again. And that day won’t be too far off — 30 to 60 days maximum.
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.
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