3 Big Issues Driving Apple Stock Lower

| About: Apple Inc. (AAPL)
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Apple (NASDAQ:AAPL) is an incredible company with amazing products and management. However, the stock has been performing poorly for awhile now. To be fair, the markets in general and tech stocks have been in decline for weeks, but in the past Apple has been able to rise above and show strength even when the market and other tech stocks were dropping. This no longer appears to be the case.
Of great concern now is that Apple shares are trading below their major support levels, having just dropped below the 200 day moving average of $325.90. Apple shares are trading at $320.26. The 50 day moving average is $338.98 and the 200 day moving average is $325.90. Earnings estimates for AAPL are $24.76 per share in 2011 and $28.72 for 2012. The 52 week range is $235.56 to $364.90.
It appears there are three significant issues that are causing Apple shares to drop below major support levels:
1) Continued concern over whether Steve Jobs will continue to remain in his current position at Apple. I think most of this concern is already discounted in the stock. However, if he were to resign in order spend more time on his health and with his family, then it is likely that the shares would drop further.
2) The "law of large numbers." As stated on Investopedia.com, "When relating this concept to finance, it suggests that as a company grows, its chances of sustaining a large percentage in growth diminish. This is because as a company continues to expand, it must grow more and more just to maintain a constant percentage of growth." You can see that here. Basically, it looks like some investors doubt that Apple can continue to post the type of revenue and profit growth that it has in the past, because the numbers have become so much larger and therefore harder to beat. I think Apple will continue to innovate and create new markets that we might not even see yet, so it's a little early to think that Apple can't continue posting strong growth.
3) Multiple contraction in many major tech stocks. You don't have to look far to see that all the big tech names are seeing their PE ratios contract. From Hewlett Packard (NYSE:HPQ), to Cisco (NASDAQ:CSCO), to Microsoft (NASDAQ:MSFT), these tech heavyweights are trading at PE ratios of about 7 to 8. These companies have not been growing like Apple, they are more mature and already have the law of large numbers working against them. Even after the recent decline, Apple is trading for about 12 to 13 times earnings. Apple deserves a premium and still has one, but the market seems to think that Apple's PE ratio needs to contract as well.
It's possible the drop to about $320 was mostly related to options expiration on Friday. If Apple shares can very quickly rally back over the 200 day moving average of $325.90, then all might be well. Otherwise, the shares could continue to slowly drift lower, or they might see a capitulation type sell off in which the stock drops substantially and on heavy volume until it reaches a new and major support level which could be around $300 or $275. If we see this type of capitulation, it would be an excellent buying opportunity for most long term investors and I would be a buyer of the stock at $300 and the $275 area. As with any stock that is showing weakness, it makes sense to buy in stages in order to take advantage of any further price decline and average into your position.
The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.
Disclosure: I am long HPQ, CSCO, MSFT.
Additional disclosure: I may buy Apple stock if it drops further.