- Following the 7:1 split, investor sentiment may have heightened to an unsustainable level.
- Apple investors should expect choppy price action over the interim.
- A late year rally may push the stock above $100.
Apple (NASDAQ:AAPL) has been able to trade higher on a 7:1 split. The split doesn't do much in the way of fundamentals, but it certainly does impact the bullish sentiment around the stock. Looking over the comments section of my Apple article, I was a little more modest on my upgrade; however bulls thought I was being way too “conservative.”
Admittedly, my most optimistic scenario involves earnings multiple expansion, which will require investors to pay more for the same earnings. Apple currently trades at a 15.4 price-to-earnings multiple, which is low when compared to peers. But for Apple to reach my $101.28 price target the 2014 price-to-earnings multiple will have to reach 16.04. That modest differential in heightened sentiment would add $51 billion to Apple’s market capitalization, which is a really hard hurdle in terms of aggregate demand for equities. The S&P 500 cyclically adjusted price to earnings ratio, is 25.6 indicating that investors are willing to pay a higher price on equities in general. The problem with a $550 billion float has less to do with the fundamentals of the business, but more to do with the sheer size it would take to move the price of the stock anywhere.
Assuming Apple does trade at $115 that would put Apple at $805 pre-split. Remember Apple’s all-time high was $701. Therefore, my estimate is scraping the very fabric of “most optimistic” case scenario for 2014. Investors quickly forget the previous resistance areas once the stock splits, because they lose track of value (what they paid for the same stock).
Traders assume that after a split occurs, the psychological effect of the split would impact larger decision makers at hedge funds and mutual funds. But I assure you; buy-side analysts are even more intelligent than sell-side analysts and keep much better track of value. Therefore, it’s unlikely that because of a stock split, the stock price will miraculously double in the course of a year. That would put Apple at a market capitalization in excess of a trillion dollars. When stocks reach this level of scale, standard valuation methods and models might as well get thrown out of the window.
The stock is already up by 66.13% from its 52-week low to add even further to its valuation will take more time. The recent pullback in its valuation is extremely healthy. Apple will report Q3 earnings on July 21st -25th (Apple’s fiscal year ends in CY Q3), between now and then, the stock will most likely consolidate. This will give investors plenty of time to accumulate stock (dollar cost average), and wait for a late-year rally to take the stock above $100. The resistance at $100 will be formidable, because $100.75 is Apple’s all-time high.
I expect Apple will at least reach $101.28 by the end of 2014. However, I don’t expect this to be the easy elevator ride we experienced for the past 52-weeks. Expect some choppiness in the Apple trade over the coming weeks.
Assuming investors have the right mindset (long-term buy and hold mentality), a minor dip in valuation should be no problem, and will make for a great opportunity to accumulate an even larger position on the company.
To see Apple’s latest stock price movement, click here (NASDAQ:AAPL)