Spit Out This Apple

10/23/2008 1:00 pm EST

Focus: STOCKS

Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocellyn Drake, analyst at Schaeffer’s Investment Research, says the tech icon may struggle to get its share price much higher.

A recent article in Fortune (“Will Steve Jobs Outrun a Bear?,” October 14) takes an upbeat look at Apple (Nasdaq: AAPL). While the author, Jon Fortt, acknowledges that the holiday shopping season is likely to be tight this year due to the weak economic atmosphere, he is quick to point out that "in the horrible fourth quarter of 2000, for example, consumer PC sales dropped 3%—painful, but not disastrous." Fortt writes that the key for Apple will be finding a way to "outrun PC makers like Hewlett-Packard (NYSE: HPQ) and Dell (Nasdaq: DELL)."

In addition, the article indicates that Apple is the best aligned to take advantage of what consumers are looking for this shopping season. "Back in 2000, Compaq had a strong holiday season because it correctly guessed that consumers would want CD burners built into their PCs,” he writes. “This year, consumers seem likely to be excited about laptops that are thin and lightweight yet affordable. If thin and beautiful is in, that's good news for Apple."

Another boon is that "analysts expect Apple will lower prices in a nod to tough economic times—entry-level MacBooks will cost as little as $800 or $900, nearly 20% less than the current prices." The article contends that part of the reason Apple has done so well lately is that it makes so much profit on every PC it sells.

[Indeed,] hopes are riding higher for this struggling tech behemoth. Apple is down more than 44% since the start of 2008. The stock has recently rebounded off its lows but is struggling with resistance at its 20-day moving average—a trend line [above which] it has not closed since late August.

In addition, the security [has hit] resistance at the $115 level. This area has served as both resistance and support in the past, and could hinder the equity during the near term. (The stock closed below $97 Wednesday, up sharply on heavy volume while the market sold off big—Editor.)

Meanwhile, investors are extremely optimistic when it comes to AAPL despite its weak technical performance. The Schaeffer's put/call open interest ratio for AAPL stands at 0.53, as call open interest nearly doubles put open interest among near-term options. This reading is lower than 99% of all those taken during the past year.

Wall Street is also smitten with the shares, as 14 of the 20 analysts following AAPL rate it a Buy or better. Should the company fail to rebound and impress these bulls, it could succumb to increased selling pressure as the optimists finally unload their long positions.

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