Saturday, April 30, 2016

Apple and Tech and the Market, Oh My

(Note: I initially published this article a week ago, before Apple's report.  Since then, their results moved the stock strongly along the bear leadership path I outlined - from $105 to $92)

This Tuesday evening, what is arguably the biggest, most successful, most loved, and most widely held company on earth gives us its quarterly report.  I speak of Apple and, while I don't own it or even pay much attention to quarterly reports in general, I will be watching this one.  I am mostly a technical analyst, and AAPL is at an interesting place right now.

I don't pay much attention to quarterly eps for several good reasons.  Most all of the "financial engineering" and creative bookkeeping that goes on is focused on quarterly eps numbers, because that's what most people care about.  But that also makes them the least telling about how the company is really doing, in my view.  I look at multi year patterns in cash flow, EBITDA, revenue, and the market's technical opinion on a stock.

As for the direction of the broad market, I look at technicals, of course, but I also look at leader groups, because they are a very trustworthy tell. Like clockwork, certain leaders turn ahead of the broad market.  For the last couple years, as I have shown in previous articles, key leader groups have been doing a pronounced bearish turn - the financials (European banks in particular), the Russell 2000 small caps, high yield debt, etc.  These groups all confirm what things like aggregate corporate revenue and successful forward looking summations like the ECRI lead indicators all show.  All this reliable data is carefully avoided by the hard working men and women at the Fed:

Getting back to Apple, they could be considered a "lead group" just by the shear reach of their products.  Although I am not a stockholder, I plan on my next computer being an Apple.

This company has not just made the best communication devices in the world, but they have been a very well run business for 20 years now.  If you look at how the stock behaved during the last bear market, you see a remarkable leadership to the upside:

The 140/200 day ema is a good divider of bull and bear markets, and when they cross, we should pay attention.  Apple didn't do the bear cross until October, 2008 and sprang back to a bull market way ahead of the broad market, hitting new highs before 2009 was done with.

So what's up with this leadership now?  Well - not so much:

Charging into October, 2014, the broad market was hit hard, but it barely phased AAPL.  But then a subtle change began taking shape.  When the SPX formed a roll-over top in mid 2015, AAPL went meekly along for the ride.  It snapped back from the August panic better than the market, but since then, it has, for the first time in over a decade, begun to be a drag on the SPX.  It did not go anywhere near a new high in the November rally nor in the current rally.

Does this technical take have any roots in Apple's fundamentals?  I refer you to an overview at TalkMarkets where this change in leadership is presented in eps numbers:

The article, saying in its title that Apple is to be the "biggest drag" on SPX tech,  shows a phase change from Apple (blue bars) pulling up the tech average (green bars) to Apple pulling down the tech average.  The current blue bar is estimate.

As for top line, if the anticipated revenue (anticipated by Apple) of around $52 billion materializes, it would be the first quarterly sales decline in 13 years.  Think of how crude our phones were in 2002. 13 years is essentially the modern era of Apple.  If that quarterly rate of sales were to persist for the next three quarters, it would be a drop of nearly 12% from the last full fiscal year.  For a company that has more than doubled its sales over the last four years, that would be a bitter pill for investors to swallow.  Unless the global economy picks up quickly, it's hard to imagine a snappy return to big sales growth.

Having said all that bad stuff, the stock is not an overpriced balloon in search of a pin, like so many these days.  For the aforementioned revenue growth of the last four years, you are paying a price-to-sales multiple of just 2.6 - very cheap compared to the industry average (as defined by Morningstar) of 2.0, and the PE is just 11 for the disappointing earnings.  Even if you believe we are heading into a bear market for awhile, you could put this on your short list of longs to hold while waiting for better conditions if you don't care to try to time the possible bear.  This is especially true since Apple installed a dividend of around 2% - quite competitive in our new NIRP world.  Apple will live to fight another day.

I, for one, am going to be interested in the behavior of AAPL this week.  The stock has already clearly broken down out of the current rally.  If the quarter doesn't propel the stock back up through $115, its bear leader status won't change.  It really will be in limbo if it doesn't go through $130 and retake the baton of leadership.  And even if it were to do that, it would be one leader group saying "bull" while all the others continue to say "bear".  But maybe Apple will be the first to change its tune.

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