Last year was a dominant year for Apple (NASDAQ:AAPL). Shares of the tech giant rose more than 100% from its January 2019 lows, and ended the year higher by more than 86%. That kind of move is impressive for any company, whether it’s Advanced Micro Devices (NASDAQ:AMD), Tesla (NASDAQ:TSLA) or any other high-octane growth company.
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But that’s the thing: Apple isn’t a high-octane growth company.
That’s why when we consider the size of Apple, its rally is even more impressive. Remember, Apple and Microsoft (NASDAQ:MSFT) are the only two U.S. public companies that trade with a market cap in excess of $1 trillion. At the January 2019 lows, Apple had a market cap of $662 million. As of the close on Tuesday (Dec. 31), that figure had swelled to $1.304 trillion.
That $642 billion in market cap gain is wildly under-appreciated in my view. That’s the combined value of Uber (NYSE:UBER), Citigroup (NYSE:C), Disney (NYSE:DIS), Roku (NASDAQ:ROKU) and Netflix (NASDAQ:NFLX). Just to give you an idea.
I always find the concept of “fear of missing out” interesting. FOMO drives investors to pile into stocks with momentum. It causes investors to chase Apple when it’s up 50% in a few months and up about 100% from its annual low. Rather than say, buying near those lows, investors tend to congregate at the highs.
Is 2020 setting up for disappointment?
There are no secrets when it comes to Apple. Everyone knows it has a monster balance sheet, colossal buyback program and the most successful consumer electronic device in history. With no stone left unturned then, why do investors struggle to understand this name so much? Why does the stock suffer from so much volatility?
In regards to the former — understanding Apple — I think investors overcomplicate the company.
Think about it. Apple runs a razor/razor blade model. Only instead of giving away the razor in hopes of generating razor blade sales, it sells the razor (the iPhone, iPad, etc.) for billions in profit per year. Then it generates razor-blade sales (Services revenue) on top of that.
All the while, it generates immense cash flow — roughly $59 billion over the trailing 12 months — and buys back gobs of stock. The business model is simple and investors overcomplicate it by worrying about minor details and reading too many headlines.
Being Realistic With Apple Stock
We need to pick and choose our spots where the risk/reward is favorable, and just sit tight on this incredibly well-run company. We’ll get to that part in a minute — the charts — but let’s look at some other facts.
The price-to-earnings (P/E) ratio is not the end all, be all stat in the stock market. But at 23 times earnings, it’s the highest reading for Apple in a decade. Also in the past decade, Apple has only returned more than 30% in a calendar year three times. Each of the following years have been subpar, to say the least. In those years following a 30%-plus gain, Apple has also suffered big drawdowns too, (in excess of 25% each time).
Now one could argue that Apple’s move to Services revenue makes it worth a higher valuation. One could also argue that its historical price action isn’t indicative of future returns.
I agree with those statements and wouldn’t sell Apple simply because of how much it rallied last year. But based on its charts, valuation and how much it has rallied lately, I am simply not a buyer here.
That’s even as estimates are favorable for Apple — with calls for 6% and 7.7% revenue growth this year and next year, respectively, and 10% and 14.2% earnings growth in 2020 and 2021, respectively — and a 5G iPhone is likely coming this fall.
Finally, let’s look at the charts.
Source: Chart courtesy of StockCharts.com
A look at the weekly chart shows just how intense this move has been.
Apple is up 57% from the August lows and it has rallied in 14 of the past 15 weeks. Shares are up in 17 of the past 19 weeks, provided Apple ends the week of Jan. 2 higher. It’s also worth noting that its two “losing” weeks in the stretch were losses of 0.47% and 1.5%.
Apple’s relative strength index (RSI) sits at 87. This measures how overbought or oversold a stock is. On its own, it’s worth little. But when used with other measures, it can be one more catalyst for flat or negative returns in the intermediate term.
I love Apple for the long term. But before buying the stock, investors at least need a dip to the 10-week moving average. And preferably, a deeper correction than that to shake off some of the excess.
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