Apple Stock Down 33% in Four Months... Is it Time to Buy?
Companies / Tech Stocks Jan 27, 2013 - 01:24 PM GMTBy: DailyWealth
Dr. Steve Sjuggerud writes:
"If anything, I wish I had been more aggressive with the call," I told my True Wealth Systems analyst Brett Eversole yesterday morning.
In the September 27 DailyWealth, I warned readers of a potential peak in Apple's share price. Four months later, the stock is down 33%.
As longtime readers know, I don't touch hyped stocks like Apple. And while I don't usually like calling tops, the Apple story in September was too good to pass up.
Apple was the hot story. It had just made new all-time highs. CNBC reported on the company nonstop. Based on sentiment, I knew the top was either in... or close.
The timing was just about perfect. Apple's stock has crashed since late September, down 33%. And many investors are left wondering if now is the time to buy...
My answer is simple... While it might seem like a great time to buy Apple (NASDAQ: AAPL), I wouldn't put a dollar into the company today. Here's why...
The talking heads on CNBC might make it seem like everyone has given up on Apple. But that's not the case.
First, of the 58 brokerage firms that cover Apple, 48 have either "buy" or "strong buy" recommendations on the company.
Only one brokerage has a "sell" rating, and two brokerages have "underperform" ratings. When I wrote my initial piece, only one brokerage had a "sell" rating on the company... So while brokerage analysts are less bullish on Apple, 95% of analysts still have a "hold" or better rating on the company. Analysts haven't given up yet.
More importantly, investors haven't given up either. In fact, based on one measure, investors are backing up the truck...
When I called the top in Apple, I noted an extreme in the ratio of the volume of call- and put-option trading.
Remember, buying a call option is a bet that the stock will go higher. Buying a put option is a bet that the stock will decline.
Back then, traders were buying an extreme amount of call options, relative to puts. They were betting that shares would head higher. The contrarian trade was to take the opposite bet... to go short Apple.
Now, with Apple's stock crashing, you would expect investors to follow the trend and short the company. But that's not the case today...
As I write, the put/call volume ratio is at its lowest level in 11 weeks. That means investors – specifically, options traders – are the most bullish they've been since early November.
As contrarians, we never want to buy when everyone is bullish. Extreme bullishness often causes the market of buyers to dry up. And when no buyers remain, the stock usually goes lower.
Even though the stock is falling, investors are still incredibly optimistic today. Option traders are backing up the truck, trying to buy the bottom in the stock.
Of course, everyone could be right. Apple's stock could turn around from here. It still sells a fine product. And the company is still a good value. But I'm not interested in buying today.
Apple is down 33% in four months. The trend is clearly down... yet investors are giddy to buy shares. They're still incredibly bullish. And analysts still love the company.
This is the opposite of what we look for... We want to buy what's ignored... what's hated. And we want to buy it after it's begun an uptrend – to limit our risk.
Apple could be a good buy at some point in the future. But the trend is down, and investors are still bullish. That's not what we look for in an investment. Apple isn't a buy today.
Good investing,
Steve
Good investing,
Steve
P.S. You can read more about these coins on Dana's website. (Please note: I don't get any compensation for recommending Dana or any other coin dealer.)
The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.
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