Apple: P/E Vs. Return

| About: Apple Inc. (AAPL)


At relatively short time intervals, there is no correlation between the P/E level and the subsequent returns on Apple's stock.

However, this interdependence is clearly identified over larger time intervals.

The analysis of the detected interdependence indicates the overvalued state of Apple based on its current P/E.

Here is a small research dedicated to the nature of interdependence between the P/E multiple and the subsequent returns on the company's stock.

Calculations were performed based on Apple's (AAPL) historical data.

In my opinion, the results will be of particular interest to those who are considering buying Apple's stock as a long-term investment.

First of all, I considered the relationship between the values of the P/E multiple and the subsequent 60-day price returns on Apple's stock. In other words, I calculated what returns the investors got 60 days after buying Apple's stock at each P/E starting from 2007. The result disappointed me - no interdependence was found:

Next step, I examined a similar interdependence, but this time, I used 270-day price returns (taking holidays and weekends into account this is approximately equal to the calendar year). The result was of a better quality and even visually you may notice a clear inverse interdependence between the value of the P/E multiple and the subsequent annual price returns on Apple's stock:

However, this result is not satisfactory because the scatter of data relative to the trend line is so substantial that it does not make sense to build any predictions.

After giving it some thought, I realized that over the 10-year period, the character of interdependence between the P/E and the subsequent Apple's returns has been changing with the development of the company. Therefore, we should not analyze the period as a whole, but each year separately. That's what I did:

Now it is already possible to make the first conclusions.

Firstly, starting from 2007, almost every single year witnessed a strong inverse interdependence between the level of the P/E multiplier and the subsequent annual price returns on Apple's stock. There were only two exceptions - in 2011 and 2016. I.e. 8 out of 10 years obeyed this rule which allows stating the presence of the patterns.

Secondly, it is obvious on the chart above that over time the interdependence trend between the parameters shifts to the left along the x-axis.

Next, let's look at the most recent period of time - for example, the last four years:

Remember, we do not take 2016 into account because no interdependence was detected that year. However, judging by 2014 and 2015, Apple's stock bought at the current P/E level steadily yielded negative annual price returns.

There is still not enough data for 2017 (I analyze the annual returns), but it is already safe to say that there is an inverse relationship between the indicators (R^2~0.68), i.e. the main pattern is observed.

Why is this relevant to the current situation?

As I noted in the comments to the third graph, the interdependence between the P/E and the annual price returns has a tendency to shift to the left along the x-axis over time. I.e., we can expect with a relatively high probability that a similar inverse interdependence between the P/E and the returns will be observed in the current year, and it is very likely that it will be shifted to the left relative to the trend reflecting the interdependence in 2017. This means that the annual returns on Apple's stock purchased at the current P/E level will probably be negative or close to zero.

P.S. Responding in advance to the probable future comments to this post, I would like to be clear: I have nothing against Apple, neither consciously nor unconsciously (although one cannot be sure in the latter). But, I evaluated Apple through the multiples adjusted for the expected growth, and according to this evaluation, the company is currently overvalued. I also built the DCF model that did not detect a significant growth potential. I also analyzed the "fair PE" of Apple and got the same result. This time I looked at Apple from a different angle, and again concluded that the company is overvalued. So, I believe, it is very likely that Apple is really overvalued…

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.