Is There An Apple Disconnect?

| About: Apple Inc. (AAPL)

The price action of Apple may show a disconnect from its fundamentals but the technicals just may signal some signs of support.

The price action of Apple (NASDAQ:AAPL) still seems to defy logic. In December I wrote an article on titled "Apple is a Bad Investment" where I explained that most investors look for long term investments in companies that are forecast to have increasing revenue and earnings. Investors look to analysts interpretations of a company's annual reports and then make forecasts and recommendations based on those projections. We would expect a stock that has positive growth forecasts to increase in price.

Apple however has had a disconnect from this general theory and as everyone is forecasting great things but the stock keeps going down. Let's use a Barchart prepared graph to look at the stock's price action over the past 6 months:

It's not hard to see that Apple is in a downward trend. Normally we look to the market and rationalize that the reasons good stocks are tanking is that the market is tanking. To see if that's true I use another Barchart prepared graph to show Apple's price action compared to my market proxy of the Value Line Arithmetic Index of 1700 stocks and note a further disconnect from the market:

We can't blamed Apples price adjustment on the market, so next we look to see if it's over priced. Apple today is trading at a P/E ratio of 12.28% while the Value Line Index is trading at a P/E of 15.40. Apple is actually trading at a discount to the market.

Let's look at all the numbers and see how to proceed:

Barchart technical indicators:

  • 56% Barchart technical sell signal
  • Trend Spotter sell signal
  • Trading below its 20, 50 and 100 day moving averages
  • 19.79% down for the quarter
  • 25.76% off it's 1 years high
  • Relative Strength Index 44.02% - I like above 50 %
  • Barchart computes a technical support level at 517.69
  • Recently traded at 523.42 which is below its 50 day moving average of 553.73

Fundamental factors:

  • Widely followed on Wall Street where 48 brokerage firms have assigned 58 analysts to monitor the numbers
  • Analysts project earning will increase by 15.20% next year
  • Earnings are estimated to grow by 17.40% next year
  • Earnings are predicted to increase annually by 20.67% for the next 5 years
  • P/E ratio at 12.28 which is below the market P/E of 15.40
  • Dividend is at 1.96% slightly below the market dividend rate of 2.30
  • The company has an A++ financial strength rating
  • Company can't seems to fill orders fast enough, there are no excess inventories carried and most suppliers report they have capacity to fulfill new orders
  • Fundamental factors look fine

Investor interest:

  • Wall Street firms have published 21 strong buy, 28 buy, 6 hold and only 3 sell or under perform recommendations to their clients
  • I use Motley Fool to gauge the individual investors sentiment and on that site 29.134 readers have given an opinion and they voted 92% that the stock will beat the market
  • Short interest has remained steady at about 1 days volume so that should not be a concern
  • Good interest by both the professional and individual investors and the short boys are not building larger positions

I always like to compare a stock's price action to it's peers and over the past 6 months AAPL is down 16%, IBM (NYSE:IBM) down 3%, Hewlett Packard (NYSE:HPQ) down 19% and Dell (NASDAQ:DELL) down 9%. Nothing really kicks out here:

Summary: Apple at the present time has a true disconnect from accepted fundamental factors. The stock is trading is in the opposite direction of its revenue and earnings projections and its P/E show it is not over priced from a market yard stick. What to do? If you have it hold it. If you are risk adverse or waiting for a sign to jump in I think you can see that the stocks downward price momentum as measured by the 14 day turtle channel is finding a bottom support point.

I for one do not own the stock at the present time. I previously placed sells when the stock crossed the 100 day moving average. In the long term I like the stock and will be back in when I see the upper turtle channel increase.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.