Is Apple Running out of Juice?

Apr 24, 2012, 08:47 ET from CMC Markets

LONDON, April 24, 2012 /PRNewswire/ --

CMC Markets provides an analysis

Apple's explosive rally from near $350.00/share last November to well over $600.00/share earlier this month has left many traders talking about whether the stock is now in a bubble.

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Colin Cieszynski, Senior Market Analyst at CMC Markets ( Canada said: Fundamental and technical indicators have been sending conflicting signals about whether Apple is in a bubble From November 25th through April 9th, Apple shares gained 74.9%. Over the same time frame, the Dow Industrials went up 15.1%. The company also has blasted through the high end of a channel and the chart has gone parabolic or nearly vertical. Technically this suggests that Apple is probably in a bubble and vulnerable. In contrast,fundamental indicators suggest that the stock could still have room to run for a while.

These indicators include:

  • Apple's weighting in the NASDAQ 100 has jumped from 15% to 19% in recent months, but remains below the 20% level it was at in late 2010. Alarm bells could be triggered were this to rise into the 25-30% range in the coming months.
  • Apple's current Price to Earnings (P/E) Ratio has climbed up toward 18 but still remains low relative to most of the last decade.

  • Companies with a higher growth rate can support a higher P/E ratio. With 1 being considered average for the PEG ratio and 2-3 sending out warning signals, Apple’s current 0.3 ratio suggests considerable upside remains possible.

With the explosive rally in the stock has also come a parabolic increase in expectations for the company’s products and financial results. Recent idle chatter around the markets of a $1,000 share price or a trillion dollar market cap ($1,072 per share) suggests that hopes have become extremely high for the company’s continued success. Over the last few weeks, however, technical signs have become more ominous, suggesting the stock may be running out of steam.  The real question of whether this is a speed bump or if the bubble may be about to burst could be answered on April 24th, when Apple is due to release its next earnings report.

Colin Cieszynski continued: “While a positive result could send the shares substantially higher over time, a miss could accelerate the correction that already appears to be underway. A return to Apple’s longer-term trend could take the shares back toward the $400-500 range pretty easily. Based on current trading, whether Apple next move either above $620 or below $580 could give a strong indication of whether the bulls or bears prevail for the moment..  

    Table one
               Weight in
    Date       NDAQ 100     P/E
    12/31/01   0.90%
    12/31/02   0.90%       43.4
    12/31/03   90.00%     101.7
    12/31/04   0.90%      863.6
    12/31/05   6.00%       46.3
    12/31/06   6.70%       37.3
    12/31/07   6.70%       50.4
    12/31/08   9.80%       12.5
    12/31/09   15.40%      23.2
    12/31/10   20.00%      21.2
    12/31/11   15.00%      14.6
    04/05/2012 19.40%      18

Source: Bloomberg, CMC Markets

Table two

              EPS    Growth PEG
    09/30/05   1.56
    09/30/06   2.28  46.15% 0.52
    09/30/07   3.92  71.93% 0.69
    09/30/08   6.77  72.70% 0.37
    09/30/09   9.07  33.97% 0.35
    09/30/10  15.15  67.03% 0.26
    09/30/11  27.67  82.64% 0.25
    09/30/12F 44.03  59.13% 0.30
    09/30/13F 50.42  14.51%

Source: Bloomberg, CMC Markets

Notes to Editors

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