Can Apple Keep Flying High?

09/21/2010 1:00 pm EST

Focus: STOCKS

Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Andrea Kramer of Schaeffer’s Investment Research says the great technology company faces somewhat slower growth and almost universal optimism about its future, raising some questions.

[A recent] Fortune article (“Buying Apple Stock? Think Twice,” September 9th) admits that Apple (Nasdaq: AAPL) is "the most influential company in the world today," with a "growing cult of worshippers" and a design aesthetic that "permeates consumer products these days."

What's more, the stock has skyrocketed more than 425% during the past five years, with profits rising at an impressive 59% annual rate—making AAPL the globe's third-most-valuable company by market capitalization.

However, the [writer, Scott Cendrowski]—in true contrarian fashion—points out that "Apple's stock price is built on the expectation that sales will continue to rocket," with analysts, on average, predicting profits to rise by 63% in 2010 and 22% in 2011.

Echoing that argument, data from Research Affiliates indicates that "Apple's sales and cash flow have to nearly double to match those of lesser-valued tech titans" like Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM) to make the stock fairly priced relative to those companies, with analysts warning investors to "stay away from Apple if you prefer not to gamble with unfavorable odds."

What's more, the author waxes nostalgic on the recent iPhone 4 antenna problems, which proved that Apple's business model is rather brittle, and that the stock could succumb to selling pressure. In addition, "the recession proved that Apple isn't immune to a lousy economy," as evidenced by the company's earnings growth of 35% in 2009, compared to 75% in 2008.

As such, the columnist concedes that Apple is a great company and shows every sign of remaining that way, but cautions that with its "underdog days" now in the rear-view [mirror], the firm "faces a nemesis that can paralyze any stock: the tyranny of high expectations."

As the aforementioned Fortune article noted, the shares of AAPL have been impressive on the charts, advancing more than 53% during the past 52 weeks. However, what the column fails to highlight is the stock's ongoing battle with the $270-$280 neighborhood, which has acted as a staunch technical barrier since mid-April, and could continue to exert resistance. (It closed over $283 Monday on average volume—Editor.)

Furthermore, AAPL's relative strength index (RSI, a measure of a stock’s momentum—Editor) of 64 is knocking on the door of overbought territory, which could spell trouble for the security in the near term.

Against this backdrop of elevated expectations and lingering challenges on the charts, the shares of AAPL are vulnerable to an unwinding of optimism. Should the Street abandon the stock's crowded bullish bandwagon, a wave of negative analyst notes could spur selling pressure on the beloved tech behemoth.

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