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Summary

  • Based on the consolidated equity research Targets & Ratings, research analysts just hit their bulls-eye price targets after Apple executed its 7 for 1 stock split.
  • New Apple investors should consider what market participants will do with Apple stock now that the market price has hit its street-wide targets.
  • Investors should really consider how Apple will manage to keep growing and surprise investors with growth; an area the new management has failed to show investors.

Based on the consolidated equity research Targets & Ratings, equity research analysts just hit their bulls-eye price targets after Apple (NASDAQ:AAPL) executed its 7 for 1 stock split. Below is a chart of all Equity Research analyst Targets & Ratings for Apple (buy/sell distribution) with an overlaid target price vs. actual market price line chart. Interestingly, equity research analysts have nailed Apple's target price this month after setting a trailing higher target for several years.

Apple's Target & Rating Research Distribution

(click to enlarge)

Source: FactSet, Edgar Filings, IBES, Independent Research Firms

For most readers, research analyst targets mean absolutely nothing, but that is a bit careless and I'm going to explain why. It's easy to find an undervalued market opportunity and invest in the "right price," but it is extremely difficult to identify undervalued opportunities and have the market react to the same opportunity after execution. The general investment manager and hedge fund hold several investment discussions with equity research analysts to mainly identify overlooked technical details (think supplier locations, distributor networks, and supply chain inefficiencies in Apple's case), or in many cases to get a different view on an investment idea (both bullish or bearish, since most portfolio managers will go long and short several different stocks at a time), before committing capital to the trade. So like it or not, equity research analysts have a significant impact on security market prices especially when you have the buy-side investing several million dollars at a time (even when the research analysts are completely off with their projections or expectations).

What I think is very interesting in Apple's case is the distribution of the equity research targets and the firms issuing the research. Below is the distribution of EPS estimates by research firm to show where research firms think Apple will finish this year. Most of the large sell side investment banks (Deutsche Bank, Nomura, Morgan Stanley) forecast estimates under the $6.31 mean per share (the mean is averaged and based on all EPS estimates available in IBES), while more buy-side/independent firms see Apple beating the $6.31 mean of all EPS estimates for the year.

2014 EPS Estimate Distribution by Research Firm

(click to enlarge)

Source: FactSet, Edgar Filings, IBES, Independent Research Firms

So, why is this important: most investors taking on a new position in Apple should understand that there are now reasons to be against upward price movement based on EPS estimates and opening a big opportunity for investors going short (the target prices have been met by most research analysts and downward pressure could easily come next). Additionally, Industry Comps now make Apple look fairly overvalued compared to peers (view the chart below).

Apple's Industry Comps

(click to enlarge)

Source: FactSet, Edgar Filings, IBES, Independent Research Firms

An additional item to consider is the Top 10 Institutional holders and Top 5 Insiders. Based on the top 10 institutional owners chart below, the last six months saw the top 10 institutions net selling than buying (but not by a material amount).

(click to enlarge)

Conclusion

It would be wise to consider where Apple's current price is trading at and whether market participants still see the upside with Apple (considering research analyst price targets). There are a variety of factors to consider when evaluating Apple's upside from this point: 1) will the new management keep the innovation momentum, 2) will iPhone sales continue to hit new highs, 3) will wearable tech really move Apple to the next level, 4) how will Apple actually perform against smaller competitors accelerating their go-to-market strategies (in example: FitBit in wearable tech), and 5) will Apple's competitors make Apple look like a Facebook's My Space in a couple of years. These are all good points to be considering from the current price point because research analysts have hit their price targets. The only question now is if the smaller investors have hit their price targets with Apple.

From someone who has traded on market news, the equity research divisions of all institutions is a very important function to the valuation and investment decision process because after price targets are hit, net shorts become the new consensus for market price positioning. This should serve as a strong indicator that the market price will be forced down solely on the fact that the upside has now been maxed out and large investors may rotate their money into more growing opportunities (and this will therefore drive the market price of AAPL down).

Source: Equity Research Analysts Covering Apple Hit The Bulls-Eye!