Will Apple Stock Remain Stagnant?

Jun.20.12 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) investors tend to be on the extremes. There are the bulls who assert that the stock should easily trade north of $800 if not more, based on the low P/E multiple, especially compared to other growth stocks on the market. Then there is the opposite argument that Apple's rapid rise in early 2012 should bring about a similar downside correction. That latter group suggests such a fast increase in the stock is not possible for a company of Apple's market cap.

Apple's stock has frustrated both groups of investors in the recent months, however. The stock did experience a correction from its peak around $645 and then it just stagnated around the $570 level.

My own opinion about Apple is that it is roughly a $750 stock. It is a great company, but it also is a company that has completed its growth stage. Based on that fact and given its huge market cap, the stock will fail to generate profits beyond the increase in the Nasdaq index. It is probably wise to invest in the Nasdaq QQQ ETF (NASDAQ:QQQ) rather than Apple stock. That way investors would still be exposed to gains in Apple but would protect themselves from stock specific events that might damage Apple.

Also, here are some facts to consider in evaluating whether Apple stock will go back to its rising trend to bring excess profits or will start to just move along with the Nasdaq.

  • Apple's price movement is typical of a consolidation pattern. In the post-financial crisis environment, Apple has gone through this consolidation pattern when the market was weak and when market sentiment improved Apple's stock just exploded to the upside. This obviously is a very bullish opinion about what might happen to Apple's stock if the Eurozone situation improves. However, this opinion also assumes that Apple's stagnation is not due to its fundamentals but due to the weak market environment.
  • Apple is seriously stagnating in the North American market. Even bullish Apple investors acknowledge this. However, the argument is that the Chinese growth will more than make-up for the North American stagnation. In my opinion, it is a very serious mistake to take granted the role of the North American market in Apple's success. I have written a more detailed article about this issue. You can check the article and the comments by bullish investors (about how even the bullish Apple investors acknowledge Apple's stagnation in North America).
  • Apple's market cap will indeed become an obstacle to further gains if it goes up by another $150B, in my opinion. Contrary to popular bullish opinion on Apple, there are factors other than the P/E and fundamentals, that determine a stock's valuation . If Apple's market cap goes above $650B, no matter how much new money comes into the stock, it will start to be insignificant compared to the size of the company. That fact will impede further excessive gains in the stock beyond the rise in the stock market.
  • The downside on Apple's stock is fairly limited. Apple as a company never utilizes a "growth instead of profits" strategy. The company maintains its margins very successfully and aggressively. Therefore, even if its growth slows, Apple will still be a hugely profitable company and that will limit the downside on the stock.
  • If Apple were to initiate a special dividend and got rid of its excess cash balance that would be hugely bullish for the stock, in my opinion. That unneeded cash is causing an unnecessary burden on the company by putting it under pressure to find a use for it. If the company were to get rid of it, that would shield the company from distractions about what to do with its cash.

I have tried to give a rather balanced analysis on what factors to consider about what might affect Apple's stock price after the huge increase in the stock in early 2012. My trading suggestion is to use the QQQ ETF rather than Apple, since that trade eliminates unnecessary stock specific risks in Apple. I will try to post a follow-up article to that trade suggestion when there is more clarity about Apple stock's movements. Investors who find my analysis of good quality can use the "Follow" feature of SA to get that follow-up article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.