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Summary

  • AAPL overshot to the downside months ago.
  • Recently, the stock overshot to the upside.
  • The P/E looks rich compared to growth as well.

The current and expected EPS growth rates for Apple Inc. (NASDAQ:AAPL) are not impressive, the multiple now officially looks rich when compared to growth, and the stock has recently tested an inflection point. As a result, investors should expect additional downside.

Our observations suggest that AAPL overshot to the downside, but after this recent increase it has also overshot to the upside. We expect another opportunity for buyers after the stock falls back, but most recently it has been much better for short sellers.

Although recent earnings results showed modest improvements from the prior year, they are still lower than the year before that, and overall earnings trends for the past few years have been flat. The earnings chart below shows us that growth at Apple has basically been flat since the fourth quarter of 2011, and the volatility that existed between now and then was warranted because investors before then had been a custom to eye popping growth rates.

(click to enlarge)

Clearly, the landscape for growth has changed as Apple saturates its market, and although prospects for new products continuously are discussed and debated, the current trend for earnings is not up. Instead, earnings have been neutral and most analysts do not expect that to change.

From a valuation perspective, Apple trades at 15 times earnings, a multiple that is not significantly high compared to other stocks we know about, but those stocks are growing at much faster rates where Apple has not been growing at all recently. In order for a multiple like this to be warranted some growth needs to be realized, and thus far there has been no EPS growth since the fourth quarter of 2011, so this 15 times multiple reflects a rich valuation for Apple specifically.

In addition, and importantly, Apple has also recently tested a longer-term level of resistance as that is defined in our real time trading report for AAPL. By rule, if resistance levels are tested we should expect them to hold and we should expect stocks to decline from resistance to support. Resistance was tested recently, resistance held, and Apple has begun to pull back slightly. If that continues the relatively rich valuation will allow for multiple contractions and a decline to longer-term support should be expected. Use resistance as your risk control though, and if it breaks pull the plug.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article. AAPL may be recommended as a short to clients of Stock Traders Daily when short signals surface again.

Source: Apple May Be A Better Short For A While