Are Apple’s Best Days Behind It?

12/20/2011 3:30 pm EST

Focus: STOCKS

Gil Morales

Managing Director and Chief Portfolio Manager, MoKa Investors, LLC

Apple (AAPL) has been a legendary growth story in recent years, but the heyday may be over for now, says Gil Morales, who discusses technical and fundamental concerns facing the stock.

Apple has been a market leader and a favorite of traders for several years now, but things might be changing, and our guest today is Gil Morales to talk about that. Gil, what might be changing here for Apple?

Well there have been a couple of things that have concerned me about Apple (AAPL) for several months now. In fact, for most of the year in 2011, you haven’t seen Apple go anywhere, even in the midst of a plethora of good news. 

They’re selling iPads and iPhones like hotcakes. They’re spreading them around the world, and it’s been all good news. Now, throughout that whole time period throughout 2011, you really haven’t seen much movement in Apple, and the market has placed a 12x, 13x valuation on the forward earning stream of Apple.  

For me, that’s a problem, because I don’t look at P/E as a measure of absolute or intrinsic value, but rather how the market is valuing the forward earning stream of any particular company.

It’s puzzling to me that when company like Apple, which is arguably the consumer technology juggernaut of the new millennium, why is the market only valuing their forward earning stream at 12 or 13 times estimates when everything is going so well?

A lot of times, a P/E contracting like that in a big leader after the news has been good—and Apple has been a leader for about seven years now—that is a warning sign.

Recently, it did have a technical sell signal in the late part of September into the early part of October. You had a sharp, V-shaped move where you went down for two weeks and then one week up into new high ground after an extended price run extending off the lows of March 2009. That’s often a technical sell signal. 

For any big stock, usually when the news is all good, that is when it will top, and when you think about it, probably everybody who was going to buy Apple stock owns Apple currently. 

What about the growth of sales itself? They seem to be selling more and more. That doesn’t seem to be slowing…or does it? Is there something behind the scenes that we’re not seeing yet?

Well we had some news recently that they’ve curtailed some orders coming out of Taiwan and other areas.  Also, recently we saw some downgrades in terms of the number of iPads and iPhones that they’ll be selling going forward. 

So when things are growing so rapidly, eventually the law of large numbers works against a company like Apple because you become bigger and bigger. How do you sustain those growth rates, and it looks like that’s starting to catch up with the company.

I think at best, it’s probably dead money for now. At worst, it could top and you could see it correct 25%-35%, which would be normal for a big stock like Apple after an extended run for several years.

Then how are you trading this to profit? Are you shorting the stock outright; maybe put options? What are you doing?

We’ve been shorting the stock since the sell signal that we got at the end of September/early October when it made that V-shaped move down for two weeks and then one week up to new highs, which as a double-top type of formation, it sucks in late buyers.

Once it pierced the $400 level to the down side, we went short the stock at that point and it’s been moving lower since then. 

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