While the market was down on Monday, one stock bucked the trend on news of a potential big deal and a potential big screen: Apple.
The tech giant is reportedly talking to Comcast [parent company of NBC] about a deal which could improve picture quality for users of Apple TV's set-top box.
As well, an article in this week's Barron's titled "For Apple, Bigger Is Surely Better" reports that an analysis sees huge upside for the company with a larger-screen iPhone 6. According to the piece, Apple could see as much as between 10% and 15% in higher earnings and a gain of 20% in the stock price thanks in large part to a larger iPhone screen. In countries such as China where iPhone and iPad costs are a good chunk of one's annual salary, an iPhone often times also doubles as a tablet device.
For Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, Monday's rally in Apple's stock is enough reason to buy it based on a technical pattern that started at the very end of last year.
According to Ross' charts, the stock has been trading in a "wedge" pattern since late December, with the lower part coinciding with Apple's 150-day moving average. A wedge is formed with lower highs and higher lows over a period time, resembling a triangle or wedge.
"What we're seeing is a contraction of volatility within that wedge formation," says Ross. "This pattern is not necessarily directional per se but it does tell us that when we get a break from that volatility contraction – an expansion from the pattern – you want to trade in the direction from the break."
And, with the stock gaining 1% on Monday, that direction is up, according to Ross.
"NASDAQ down 1.5% [Monday and] Apple is one of the few stocks actually higher," says Ross. "That's very nice relative strength, which is also a bullish tailwind. You want to be a buyer here on the break from that wedge pattern. I think the stock could trade $600 under the right circumstances."
Portfolio manager Chad Morganlander of Stifel's Washington Crossing Advisors sees an even higher price for Apple, which closed Monday at $539.19 per share.
"Our price target the next six to nine months out is $650," says Morganlander. "This next gen phone will be quite appealing in the not-to-distant future."
Morganlander sees the stock's valuation as justified. Apple has a market cap of $481 billion, price-to-earnings multiple of 11.6 for this year's earnings, and an astounding $137 billion in cash on their balance sheet. However, he sees long-term problems for the company.
"The problem I have over the next 24 to 36 months," says Morganlander, "is the business model when it comes to devices like the iPhone [and] the iPad."
Morganlander says there are still relatively low switching costs to go from an Apple iPhone to an Android-powered phone. He likens it to the low switching costs in going from a BlackBerry smartphone to an iPhone a few years ago. So, while Morganlander is positive on the short-term, his long-term view sees trouble ahead.
"We are looking at a company that market cap is the largest market cap in the United States," says Morganlander. "Yes, the valuation is justified. The free cash flow is justified. And, that's why we have a price target of $650. We just wouldn't go to sleep and buy this company and own this for the next 10 to 15 years out. We'd be a little more pragmatic about it. This business model is not Procter & Gamble and certainly isn't McDonald's."
To see the full discussion on Apple with Ross on the charts and Morganlander on the fundamentals, watch the video above.
- Information Technology
- Handheld & Connected Devices
- Apple TV