By my nature I am a contrarian. I try to take cues from the herd and go the other way. For me, it is so tempting to fade the crowd and try to predict crucial turns in the market. However, I always try and base my contrarian calls on something more substantive. It can be based on fundamentals in the market, but more often than not my calls are based on technical analysis. Wall Street analysts, corporate executives and market commentators may not always tell the truth, but charts do not lie. They speak the truth, the whole truth and nothing but the truth about previous price activity in any financial instrument.
Which brings me to the world's most talked about stock Apple (NASDAQ:AAPL). The street was very bullish a few weeks ago (raising earnings and price targets) when the stock topped out at 644.00. And became very cautious, and a few analysts actually became bearish earlier this week as the stock bottomed out at 555.00.
Since Wall Street analysts are so fickle and the stock is so volatile, what can owners of this stock rely on to follow AAPL? An investor could adopt the Warren Buffet approach, "just own it and forget about it". Unfortunately, that mantra has been followed by many investors in a myriad of different issues (internet tech bubble in the early 2000's, financials on several different occasions, Gold, Silver, Oil and Enron).
At this time, the fundamentals of AAPL could not be better. The company blew away heightened Wall Street estimates, improved margins, topped estimates of sales for its I-Pads and I-Phones, while adding handsomely to their cash surplus. After the fact, is this really a surprise? By all accounts, customers were lining up to purchase the new I-Pad and now AAPL is in the early stages of worldwide deployment of its products. Therefore, it is hard to fathom earnings coming down any time soon, right? Not so fast, what is hardly being publicized by the mainstream media is that they have lowered revenue guidance for the third quarter substantially. Perhaps the company itself does not anticipate the same quantum leap in revenue and sales for the next quarter. Along these lines, imagine the reaction next quarter if they missed already lowered expectations.
Another fundamental reason for owning AAPL is that the issue has such a low price to earnings ratio. The reason for this should be obvious. Investors and funds have learned this lesson the hard way time and time again. How many times has the price to earnings ratio in stocks gone to astronomical levels only to come crashing down, when the earnings fail to meet expectations. For example, Walmart (NYSE: WMT) traded at 70.00 in 1999 and had a price to earnings ratio near 50. Now the company has greater earnings, and trades at 58.00 with a price to earnings ratio of 13. Clearly, the street's expectations for growth in WMT were overblown. And how many Wall Street firms were downgrading WMT in 2000 based on valuation? It is difficult to compare WMT with AAPL, because the price to earnings multiple is much lower, but as WMT found out, the biggest hurdle to continued earnings growth in the double digits can be the size of the company itself.
Therefore, there is some skepticism as to whether or not AAPL can continue to grow its incredible pipeline of products. For those who have asked that question after the passing of Steve Jobs, that question still remains to be answered. At this time, AAPL's two main products were created while Steve Job's was still alive. Of course, AAPL TV will be a factor, but unless AAPL can create its own unique content (which is difficult and expensive) they will be dealing with the same issues that Netflix (NASDAQ:NFLX) is dealing with. Perhaps they are hoarding all the cash in order to purchase a major media outlet to provide content for AAPL TV. I certainly cannot see the company trying to develop their own network.
There is no doubt that millions of more I-Pads, I-Phones and I-Whatevers, will be sold in the United States and worldwide. What is most important to the future stock price of AAPL is the how many I-Whatevers it creates and if those new products have nearly the same appeal to consumers as its previous blockbuster products did. That is what will drive future earnings growth.
Enough with the fundamentals, and lets inspect the technicals, both long and short term. Short-term I would focus on 600.000 for two reasons. First of all, that would be smack dab in the middle of the recent high (644.00) and the recent low (555.00). Therefore, all of the short term players that withstood the pain of being long all the way down will focus on that level as a stop-out level if AAPL retreats. On the other hand, shorts that did not cover on the way down may be saying to themselves "if AAPL ever gets back to 600, I will cover". Secondly, it will be a strong psychological level for the "little guy" who rode it up to the high and down to the low. Longer-term, you have to remain focused on the recent high and recent low. If AAPL can maintain the momentum from its recent earnings announcement then 644.00 should just be a minor stopping point as the stock blasts to new all-time highs. However, if AAPL begins to gravitate towards and trade below 555.00, then perhaps we will find out why AAPL did not reach such a high price to earnings multiple during its parabolic climb.
If you don't like the technical or fundamental approach, I can offer you one more sure-fire indicator. If you really want to know when the top is in AAPL, I will let you know when I ditch my Blackberry for an I-Phone. To be honest, I actually did purchase an I-Phone a few years ago but returned it after a few days because it was too complicated. Good thing I did not allow my technological deficiencies to parlay into a shorting of the stock.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in AAPL over the next 72 hours.