For the past two months I have written about how I believe Apple (AAPL) has lost its luster. My first article, written on September 14th, suggested that Nokia (NOK) would outperform Apple. While it has certainly done that (Apple has fallen over 22% while Nokia has ONLY fallen 8%), I believe now is a perfect time to go long Apple for a short term trade.
If this bull market is to continue higher, it will do so with the help of Apple. I find it hard to believe that Apple bulls won't be defending the lows from May 18th of $522. While it is currently dipping below that, I believe this level will be defended. Valuation, bulls argue, is cheap, at roughly 10 times earnings and the company has a hoard of cash totaling some $120 Billion or 1/4 its market cap (plenty of companies have hoards of cash that they waste away, but I digress).
I believe these two factors (valuation and defending a significantly prior low) are enough reasons for the stock to rally hard from here. I think it can rally to $620 to $630 within the next couple of months before stalling out out.
Recently, there have been a couple of glaring weaknesses with their iPhone 5 launch which has been part of the reason for the selloff in the stock:
- Apple replaced Google Maps with its own proprietary mapping app,which appears to have some major glitches.
- Newer phone scratches and scuffs more easily.
However, the larger picture is that Apple saw a massive boost from the iPhone coming off its exclusive contract with AT&T and earnings juiced the stock to $700. This boost is no longer going to cause Apple to go significantly higher but it doesn't mean there isn't a trade to be made here.
In the short term, though, it appears that the launch of the iPhone 5 and the iPad Mini could provide a boost to sales at a time that it is badly needed. Gene Munster of Piper Jaffray previously suggested that up to 1 Million iPads (large) could be cannibalized by the iPad mini. However, based on surveys it appears that the iPad mini is actually creating more demand separate from the larger iPad and might not be cannibalizing sales at all. In the short term this could be enough to shift sentiment away from being excessively bearish.
I believe Apple is worth a trade here. Sentiment has gotten so negative so quickly and valuation has become attractive enough that I think it's wise to go long Apple right here around $513 on 11/16/12. Having said all of this, keep in mind that I'm only recommending a short term trade here - possibly for the next few months. I would sell around $620 or $630. I think Apple will have trouble for a while and should consolidate its gains over the next 18 to 24 months. I suspect this will be gyrating between $500 and $650 to $700 for 18 to 24 months.
AAPL received a major shot in the arm 18 months ago when its exclusive contract with AT&T ran out and all major wireless carriers, including Verizon, picked up the iPhone. With this catalyst gone and with other smart phones playing catch-up in terms of features, I believe AAPL's profits might have peaked over the medium-term. Ultimately they will go higher on the back of Mac sales but that shouldn't give a boost to the stock until 2014.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.