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This is a tough question to answer, but one that should be asked anyway: as the third quarter of 2020 gets under way, might Apple be a good investment?

From a business fundamentals perspective, I continue to find the Cupertino company one of the best mega-cap names to own. As I discussed in more detail recently, Apple’s dependence on the iPhone has been decreasing as the smartphone industry matures. Relative to total revenues, services nearly doubled in size last year compared to three years earlier. And on the product side, wearables like the Apple Watch and AirPods have been picking up the growth slack left by the iPhone. The cherry on the cake is Apple’s large cash balance, which stood at $83 billion net of debt last quarter.

How Apple has done in 3Q

But let me set fundamentals aside for a moment.

Historically, the third calendar quarter has been a “momentum pickup” period for the company. Spring is usually the quietest in terms of sales and earnings – which, this year, could be good news since it will likely be the most disrupted by the COVID-19 crisis anyway. The late summer weeks tend to see an increase in demand due to the back-to-school season in the northern hemisphere and the iPhone refresh announcement. That leads to October, which is the beginning of the holiday shopping months and the most action-packed of Apple’s quarters. See the “swoosh-shaped” graph below that illustrates the sales and earnings dynamic through the year.

What I find most interesting, however, is that Apple’s shares have outperformed the S&P 500 the most not during the holiday season, but in the third quarter instead. Since 2010, each month in the summer period has been good for Apple relative to the benchmark, on average, with August being traditionally the best month of the year for alpha generation. See graph below.

I have a thesis to explain what happens. It is possible that investors bid up share price ahead of the most important product refresh announcement of the year, which usually happens in late September. This process may have already started in 2020 ahead of the so-called 5G supercyle. Then, in “sell the news” style, speculators bail out before the Thanksgiving weekend in the US, when they may understand that any good news regarding holiday sales may have already been priced into the stock.

The problem: stretched valuations

The narrative above sounds bullish for Apple shares in the third quarter. But value investors may have reasons to think that, this time, it could be different.

In the past 20 years, only twice before has Apple stock entered the third calendar quarter of the year up more than 80% over the trailing twelve-month period. The last time that it happened was in 2007, moments after the historic launch of the very first iPhone. A strong argument could be made that Apple shares have raced ahead of fundamentals earlier than usual in 2020, and that a correction could loom on the horizon.

I turn the discussion to the readers: do you believe that Apple is a good stock to buy at the start of 3Q?

Explore more data and graphs

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(Disclaimers: the author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)