Apple Inc.'s (AAPL) shares have just witnessed a spectacular week. On Wednesday, February 15, 2012, at around noon, AAPL shares reached an all-time intraday high price of $526.29, registering a gain of $16.83 from the previous day's closing price of $509.46.
Moments later, AAPL started tumbling lower, closing at $497.67, $28.62 below the intraday high and $11.79 below the previous day's close. The decline continued the next day, Thursday February 16, as it dropped further in the morning to reach an intraday low of $486.63, $39.66 below the previous day's intraday high, and finally bouncing back to close at $502.21.
Following Wednesday's price action, many technical analysts declared a new bear market for AAPL, referencing the intraday price action known as "Bearish Key Reversal Day," whereby it opened higher than the previous day's high price, continued yet higher, and then reversed to close below the previous day's intraday low. Although it is true that technically such price action, in the majority of instances, would result in a bearish trend, we believe there are least 3 reasons why AAPL may yet prove to be the exception.
1. Sell-Off Trigger
There has been substantial speculation as to what caused the violent sell-off on Wednesday February 15. In an article published by CNN Money, "Apple's $40 rise and fall: Was Goldman Sachs behind it?", the author, Philip Elmer-Dewitt, referenced other analysts' suspicion as to whether Goldman Sachs (GS) had something to do with it, based on possible knowledge of an upcoming Goldman Sachs conference appearance by AAPL CEO Tim Cook.
There is a known saying on Wall Street -- "Buy the Rumor, Sell the Fact" -- whereby traders believe that once an expected bullish event has taken place, that traders should possibly book their profits as the market had possibly previously already engaged in large-scale buying, based on the rumor, and little buying is left to do following the actual occurrence (fact).
We believe that Key Reversal Days hold their ground in two possible scenarios: when a major fundamental event follows, or precedes, the price action and confirms it; and when a price bubble has built, with clear indications that a stock price, or the market as a whole, has become unreasonably priced relative to true fundamental factors. In such case, the previous price action and direction has become "tired" and has exhausted itself.
We believe neither such factors apply in the case of AAPL's Key Reversal Day. Goldman Sachs conference is not a major fundamental change, and it is not unusual for share and market prices to fluctuate prior to, and after, scheduled events. Furthermore, as traders position themselves ahead of, and after, such events, it does not necessarily imply any ill-doing, nor price manipulation.
2. iPad Trademark
Another important story also broke out prior to the market opening on February 15, 2012. It was reported that a Chinese company, Proview, suspended from trading on the Hong Kong Stock Exchange since August 2010 and in danger of being de-listed due to high debt and insufficient assets, had filed a trademark violation lawsuit against AAPL for its use of the iPad name.
Although such bearish story had actually broken out prior to the market opening on February 15, when the market opened on that day, AAPL shares actually moved higher. At that time, AAPL had recently recorded positive price action including a gain of $6.86 on the previous day of February 14, in addition to having recorded gains on eight consecutive days since February 2, 2012. Hence, it would not have been unusual for trend followers to submit substantial buy-orders at the open of February 15, hence propelling the stock higher during the first half of the day.
It is possible that once such weekly momentum had temporarily subsided after the opening on February 15, the iPad story took focus, and traders decided to book their handsome profits. The combination of profit taking, in addition to the uncertainty concerning the IPAD alleged trademark violation, caused AAPL share price to reverse direction and move violently lower.
AAPL has disclosed that it had actually purchased iPad global trademark rights from Proview. Given such disclosure, it is reasonable for us to believe that AAPL has actually done so. In light of Proview's alleged weakened financial prospects, the threat of its exchange de-listing, in addition to AAPL's proclaimed purchase of Proview's global iPad trademark rights, as well as China's complex trademark laws, it is not surprising that Proview has filed such claims against AAPL. However, we do not believe that such claims against AAPL will end up resulting in substantial damage to AAPL.
Most importantly, AAPL has become an important economic force in the Chinese economy. As a $466 billion company, with potential to become the world's first trillion dollar company (as first reported in our August 15, 2011, article, "Who Will Take a Bite Out of Apple, Anyone?") with substantial manufacturing of its products taking place in China, it is highly unlikely that Chinese authorities would want to alienate one of their top foreign corporate clients.
3. Cheap Valuation
Despite Apple's recent price gains, relative to its earnings, it is our belief that AAPL is still cheap. AAPL had beaten its expected earnings for 2011 by about 20%. Currently, AAPL is expected to earn about $42.73/share for the year ending September 2012. That would provide a P/E ratio of 11.75. If AAPL beats such estimates by 10% (as opposed to the 20% beat for 2011), it would earn about $47/share, which would translate to a P/E ratio of about 10.7 . In both scenarios, such P/E multiple is rather low given the current near zero interest rate environment, and the Federal Reserve's indication that it would maintain low interest rates through 2014.
Given the preceding three factors, we believe it is highly unlikely that AAPL's Key Reversal Day for February 15 will prove to be the start of a prolonged bearish trend for AAPL, unless a substantial downward shift occurs in the US and global economy. In addition, with the added prospects for an AAPL dividend payment, as well as a possible stock split, we would not be surprised if AAPL reaches $620/share, and momentum carries it further to around $750.