Wow, Apple (AAPL) isn't going straight up any more. Apple shares have nearly doubled over the last year, and while Apple has underperformed the S&P 500, and its tracking exchange traded fund, SPY, during the recent sell-off, the stock has rebounded nicely from its mid-May lows, to around $580 a share today.
I recommended shorting Apple at around the $630 dollar level because I thought the stock lacked near-term catalysts, with the iPhone 5 launch not likely coming until fall, and also that wealth managers would likely need to rebalance these individuals' portfolios. I also thought the company's fairly conservative dividend and buyback announcement would not likely make the stock appealing to value investors.
I also recently recommended getting long Apple at around the $550 dollar level with call spreads since I thought the company's strong first quarter earnings report, and significant cash balance, would support the share price at around 11x an average estimate of next year's likely earnings. While all traders have good calls and bad ones, these calls were correct.
I think Apple's next move will be to consolidate for several reasons.
First, Apple still lacks catalysts near-term. Even though the company had a strong first quarter earnings report, the recent worldwide conference was disappointing to traders and investors. Apple hasn't disclosed the release date for the iPhone 5, but it remains unlikely the company would launch this product until fall. While Apple has had strong recent growth in China, with the company's new iPhone and iPad launches doubling its China revenues within the last year, Apple has increased iPhone sales in China by 88% year-over-year, and it's likely the company's near-term revenue growth in China will be more limited. Apple's growth in China has come as the economic data in the world's second largest economy has continued to deteriorate, and companies such as Caterpillar (CAT), Rio Tinto (RIO), and BHP Billiton (BHP), continue to report weakness in the China's real estate and construction markets a well.
Second, wealth managers will likely be unwilling to allocate new capital to Apple in the next couple months. Apple is obviously one of the most popular stocks in the market, and the company is also one of the largest holding of many top hedge fund managers such as David Tepper and Ken Griffin.
Nearly 70% of Apple shares are owned by mutual funds and hedge funds, a higher percentage than in companies widely held by institutions, such as IBM and Oracle (ORCL), and nearly double the institutional ownership level of GE and Exxon-Mobil (XOM). With Apple shares having more than doubled, and wealth managers looking to raise capital because of the recent sell-off, and rising fear levels over the European debt crisis, institutions are unlikely to significantly add to these manager's Apple positions today.
Third, the volume during Apple's recent rally has been anemic, with Apple shares trading less than a third as many shares as the company has traded on average during the last several months. While volume in Apple shares peaked in late April, when Apple was trading around 40 million shares a day, volume in Apple has risen during recent sell-offs, and has been very weak during rallies, with Apple trading less than 20 million shares a day on average during the recent rally. Stocks can obviously rally for some time on low volume, but Apple's slow move up has lacked momentum or strong buying.
To conclude, while Apple's stock has doubled in the last year, Apple shares have typically consolidated for several months after big moves over the last couple years. With Apple shares trading today at nearly 11x an average estimate of next years likely earnings, the company having nearly $100 billion in cash, and Apple's biggest product launch in years likely planned for fall, Apple shares are unlikely to sell-off dramatically in the next several months.
However, Apple's stock has also typically traded more on the company's product cycles than economic cycles, with the recent iPhone 4s launch driving the strong fourth quarter earnings report of last year. With deteriorating economic data and rising fear levels in Europe, summer typically a weak period for tech stocks, and Apple one of the most widely held stocks in the market, Apple may consolidate for some time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
