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In a prior article titled "Viewing Apple's Stock As If It Were a Dividend Achiever," we profiled Edson Gould's take on a hypothetical dividend policy.

In this review of Apple (AAPL), we're going to assess the possible downside risk based on Gould's speed resistance lines. We believe that if Apple were to fall to any of the indicated levels, Apple could be considered an ideal candidate for purchase with appropriate due diligence at that time.


(Click to enlarge)

As indicated in Gould's speed resistance lines above, the downside projections for Apple are as follows:

  • $424.15
  • $297.43
  • $212.08

In order to diffuse the legitimate claims that we're grasping at straws simply to make a bearish case against Apple Inc., we've provided the price performance of the Apple over a similar 7-year period from December 19, 2000 to December 31, 2007 applying Edson Gould's speed resistance lines, in the chart below.


(Click to enlarge)

What stands out the most in the period from 2000-2007 is the percentage increase in Apple's stock price compared to the current run-up as indicated below:

  • 12/19/2000-12/31/2007: +2,300.67%
  • 9/7/2005-4/13/2012: +1,079.56%

If we were to ask the question of what was the likelihood of Apple falling to $133.22 on December 31, 2007, we believe the chorus of Apple investors would say, "not likely, if ever." Similarly, we believe that, based on Gould's work, no one would expect Apple to decline to our conservative downside target of $424 let alone falling to the $212.08 worst case price.

We're not advocating that we've seen the peak in Apple's stock price, especially when we compare the fundamental data on AAPL between the 2007 peak and the current price:

Apple 2007 2012 % change
Sales per share 27.52 170.2 +518.45
''Cash Flow'' per share 4.37 46.5 +964.07
Earnings per share 3.93 43.8 +1,014.50
Div'ds Decl'd per share 0 2.65 N/A
Cap'l Spending per share 0.84 5.65 +572.62
Book Value per share 16.66 138.85 +733.43
Common Shs Outst'g 872.33 940 +7.76
P/E Ratio @ high price 43.53 17.23 -60.42
Source: Value Line Investment Survey Oct. 12, 2007 April 6, 2012

However, in 2007, it was justified for a non-dividend paying technology company to have a P/E ratio in the 40's while a company that could easily become a dividend aristocrat would be considered fairly priced with a P/E ratio of 17.

Few could argue the merit of investing in Apple with fundamentals that are far superior today than when the company was at the 2007 peak. In fact, even the latest dividend announcement would have a marginal impact on Apple's ability to continue the growth of the company at a 24% payout ratio. Apple's growing cash hoard in excess of $100 billion makes it unfathomable to consider that the stock could decline as much as Gould's speed resistance lines suggest.

However, we believe that markets are supremely inefficient and the perceived extremes to the upside are likely to be counteracted to the downside. Edson Gould's speed resistance lines provide a progressive downside target as Apple's price increases. If the current price decline achieves any of the indicated downside targets, we'll be ready to re-examine the company fundamentals for long and short-term investment opportunities.

Source: Considering The Downside Prospects For Apple