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Apple (NASDAQ:AAPL) stock had a great run from late June to late October. The stock increased in that time period from ~$385 a share to ~$525 a share, a gain of better than 35%. Since then the stock has been stuck in a very narrow trading range of ~$510 to ~$530 a share for the better part of a month; until yesterday. Tuesday Apple broke through its recent resistance ceiling of $530. AAPL is now at above $540 a share in early trading Wednesday. I think this is the next leg up for this undervalued tech stock for a variety of reasons.


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Consolidation:

After a quick ~35% rally over three months, some healthy consolidation was in order. The fact that there has been such low volatility within such a tight trading range should be encouraging to Apple shareholders. This is especially true given this occurred in the middle of "tax loss" selling season.

Apple may have had a great run from late June, but the stock is still down substantially from its peak of ~$705 a share in Mid-September of 2012. Plenty of hedge & fund managers who bought the stock late in 2012 were sitting on significant losses. Given the dearth of stocks (especially large and liquid ones) that have posted losses over the prior 12-18 months, it would be only natural that Apple would experience some tax loss selling as managers struggle to offset huge gains elsewhere given the S&P's 30% gain over the past twelve months. This tax loss selling should now be mostly complete.


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The China Mobile deal in back in the spotlight again:

Also helping Apple to break out is that the long rumored deal with China Mobile (NYSE:CHL) and its over 700mm subscribers seems to be gaining traction again. China Mobile just announced it will unveil a new mobile service brand on Dec. 18 during the company's 4G Partners conference.

This has been taken by the market (and I think quite correctly) that China Mobile will now carry the iPhone. Apple has already received 4G approval in China and told its suppliers to be ready to work with China Mobile. When this deal is announced it should be a significant positive catalyst for the stock. This distribution deal should help its business in the Middle Kingdom like the recent deal with NTT DoCoMo (NYSE:DCM) has done for Apple sales in Japan which I recently highlighted.

Consumer spending trends are positive:

There are several things that can be gleaned from the quarterly results from retailers ranging from Tiffany (NYSE:TIF), Home Depot (NYSE:HD), Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Darden (NYSE:DRI) and others so far this earnings seasons. They are the following:

  • Consumer spending remains tepid going into the holiday season
  • High-end retailers are doing quite well while the lower/middle tiers face challenging headwinds
  • Consumer spending on big ticket items (Cars, home improvements, consumer electronics) is robust while lower ticket items like apparel and restaurant meals are down.

These trends bode well for Apple's holiday sales. It has just released new versions of its iPhone and iPad. Given current consumer spending trends these premium products targeted at the high end customer should do very well even if holiday sales come in at or slightly below last year's levels.

Conclusion:

After spending the last month or so in a "consolidation" phase, Apple is ready for the next leg up. Despite its rise from its late June lows, Apple is still cheap at under 8x forward earnings after subtracting its over $100B cash hoard. The company is also returning nearly $10B a quarter to shareholders in dividends and stock repurchases.

Back in Mid-October when Apple broached the $500 a share level, I stated that I saw the stock at $550 a share by the end of 2013. I think this prediction may turn out to be conservative in hindsight. BUY

Source: Apple Breaks Out