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Is Apple a Value Trap?


Investors balance the risk vs. reward.

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Value Trap: A stock appears cheap when it trades at a low earnings multiple for an extended period of time. Investors looking for a bargain are "trapped" after they buy the company at a (perceived) low price and the "E" in P/E declines or is forecast to slow.

A little bit more than a month ago, Minyanville's Lloyd Khaner flagged Apple (NASDAQ:AAPL) as a stock that was shifting from a growth story into the value camp (if this theme seems familiar, it's because the Wall Street Journal ran the same article last week). For a cult stock that rallied 750% in less than four years, many investors ignored this transition. (For more on confirmation bias, click here).

Fast-forward to yesterday, when I offered the following thought:

"Gun to head, Apple springs higher after earnings, but I'm not making a bet despite the $500 level offering two-sided risk definition. It's crowded and I try to avoid crowds these days, particularly given technical analysis will soon take a back seat to fundamentals."

I was wrong on the sense (there's no hiding in the 'Ville) but right in that I didn't risk my hard-earned coin on a hairs-on-the-back-of-my-neck feel (discipline over conviction). That was then and this is now and sans emotion (not lugging exposure adds clarity) we can view the stock through a stair-step technical lens. $500 was an important support, and that level now morphs into resistance.

Some quick perspective for those involved in the stock: Last Valentine's Day, almost a full year ago, we posed an innocent enough question in the 'Ville: Is Apple in Bubble Territory? We shared a chart of previous bubbles and busts such as the NASDAQ, China and crude, and laid Apple across it. That vibe was early, shockingly enough, and to be sure, the script is unfinished. I will simply note the price point of the stock at the time of publication: $500.

Through a broader market lens, the price action today will speak volumes. Do we see sector rotation (out of N's into S's), or an outright migration (the long-awaited correction/decline)? The early action suggests the former, which would be constructive, but we've got a full day of trading ahead of us. One stair-step at a time as we continue to find our way.

Random Thoughts:
  • I carried a small Goldman Sachs (NYSE:GS) put position into today's session, with a hard stop above Tuesday's high of $146.50. I typically don't like to trade invisible catalysts (such as the insider sales window, but we can do anything as long as we're disciplined. As always, this (and other) positions will be updated in real-time on the Buzz & Banter (click here for a free trial).
  • We flagged an important support in Deutsche Bank (NYSE:DB) yesterday and the stock is bouncing a deuce (2%) this morning. Keeping half an eye peeled to that name as you can often learn a lot just by watching.
  • The NDX (INDEXNASDAQ:NDX) is getting thumped…but it remains smack in the middle of the NDX 2700-2750 channel we've been highlighting the last week or so. A break either way will be telling.
  • We haven't discussed the "asset class deflation vs. dollar devaluation" in a long time, but I pulled up the long-term chart to take a peek. Please note the ever-so-quiet head & shoulders formation in the DXY, which will "trigger" with a move below 78.50.

Twitter: @todd_harrison

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