Apple: Is $140 The Bottom To Buy?

Summary

• Apple has our overall buy signal with a passing grade of 59 out of 100.
• It has our implied return buy signal of 22.5%.
• Supply has triggered our buy on weakness signal.
• But our supply signal has yet to reverse direction.

Because of our buy signals, we have Apple (NASDAQ:AAPL) in our paper model portfolio and it continues to have our buy on weakness signal. The only questions we have are how long will these signals last and how low will price go? Let's examine the fundamental and technical data to find the answers.

Analysts

The analysts remain positive and continue raising targets. Nasdaq.com shows 21 of 30 analysts have buys while 2 have sells. The consensus target is $163 and AAPL is trading at $142.73.

The high analyst target is $202. Flashratings shows recent analysts at $160, $165 and$170.

Finviz.com shows a few analysts going to $180. The consensus target is usually conservative when targets are moving up, and this data seems to confirm this for AAPL. Our proprietary implied return calculation is 22.5% and that includes the dividend.

All of this would seem to confirm that the current pullback in AAPL price is a technical anomaly and an opportunity to buy on weakness. The lower price goes and the higher targets move, the more our implied return increases.

Maybe the value players have a full boat of AAPL and have to sell some, but what about the growth players looking for a minimum of a 20% return. When do they jump back in on the AAPL bandwagon even though it is not a 20% long term growth stock?

The answer is when they are convinced that price is low enough to give them better than 20%. Obviously if they believe the target is $160, they want to buy at $135. The truth is that support is probably somewhere between $135 and $145. I think we are approaching the optimal, low, buy price. Our implied return of 22.5% indicates it is time to buy. Our buy on weakness signal says the same. The only thing to wait for is the lowest price when our supply indicator reverses, indicating the selling is done. To play it safe, I could wait for supply to turn to demand and miss the bottom. (This supply signal is also a good trigger for a swing trade.)

Fundamental Metrics

Finviz.com gives us a quick scan of the fundamental metrics and they look good. The short term earnings growth is very good and the P/E and FP/E are low. It has an attractive FCF and dividend. The P/S, P/C and PEG are also good. The short ratio is relatively low, but I am surprised it is as high as it is, because shorts usually avoid value, dividend paying stocks with improving earnings. The shorts are not that anxious to take on AAPL. Obviously the selloff in tech, caused by the ETFs, has attracted a lot of shorts hitting the big Index stocks, regardless of valuation. Eventually the market becomes efficient and the good stocks, hit by ETF selling, go back up as portfolio managers swoop in to buy the bargains.

Technicals

As you can see on the chart below, major 50- and 200-day trends are up. The short term 20-day trend is down and has violated the 50-day reflecting the pullback in price to test major support levels. You can see our overall grade and implied return buy signals below price on the chart. Also we show our supply signal that provides our pivot signal to catch the bottom or do a swing trade.

The big question is will support hold at $140? As we come closer to earnings scheduled for July 25th, I expect to see support hold and price to start a bounce up. Good earnings will take us to a new high and bad earnings back to testing support. The market will be looking past current earnings to the future with the new iPhone in September and growth in other parts of AAPL.

Conclusion

Price is dropping because of the rotation out of tech, and not because of the fundamentals for AAPL. In fact implied return has greatly improved. Price anomalies are created by sector rotation selloffs. Such anomalies usually create bargains and that appears to be the case with AAPL. When our supply indicator reverses and starts improving, we will know the pullback is over and the bounce has started. To optimize our buy on weakness signal, we just wait for our supply signal to reverse direction and turn up. Since it is already in our paper model portfolio, we are just waiting for earnings. But we could do a swing trade when our supply signal reverses. For those who have sold call options to make some extra money on their AAPL holdings, that supply reversal signal is their signal to think about covering their short position.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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