Apple has been one of the best mega-cap investments in the past few years, if not longer. However, since September 2020, shares have been on a roller coaster ride. Priced at around $129 apiece today, Apple stock trades roughly at late third quarter levels, after having reached lows of $106 and highs of $143 over the past eight months.
Given so much upside resistance on one hand and more reasonable valuations on the other, investors must be asking themselves if now is a better time to buy or sell Apple stock. The Apple Maven will look at history to try to answer this question.
Apple stock: correction is a good sign
As of the writing of this paragraph, Apple stock traded 10% below the late January all-time high of just above $143 – what many would consider the gateway to a classic correction. Historically, it has been a good idea to buy Apple on a pullback of this magnitude.
Over the past 20 years (that is, since the bursting of the dot-com bubble), the average one-year return of investing in Apple after a 10%-plus correction would have been 8.5 percentage points higher than buying shares on any given, random day. Better yet, the risk of buying on a dip has also been smaller:
- Comparable standard deviation (that is, buying after corrections has not necessarily increased volatility)
- Less painful maximum drawdown (that is, worst one-year loss has happened when Apple stock was bought closer to it peak, not during a correction)
The graph below, which plots maximum drawdowns (x-axis) against one-year forward returns (y-axis) adds more color. Notice how the dots have a generally downward slope. This means that the steeper the drawdown today, the higher the future returns tend to be.
The conclusion from the data observations above will sound familiar to most investor: history supports the idea of buying Apple stock on the dip and selling it on strength. The caveat is that the benefit of buying on weakness may not be evident right away – so, patience is advised.
Apple stock: valuation is de-risked
There is a second version of the “buy the dip” idea above. Rather than looking at share prices, one can think in terms of valuations. Generally, it makes more sense to pay less for something of value – in this case, Apple’s future earnings.
Right before the COVID-19 pandemic became a market disrupter, in February 2020, Apple stock traded at a split-adjusted $80. After delivering EPS of $2.97 in fiscal 2019, per-share earnings were forecasted to land at around $3.25 in 2020. The forward price-earnings ratio (P/E), therefore, was 24.6 times.
Today, Apple is expected to produce $5.18 in fiscal 2021 EPS. At the current share price of $129, the implied forward P/E is 24.9 times, which is roughly equal to pre-pandemic levels.
So, based on valuations, Apple shares may not seem more enticing now than they were before COVID-19, at face value. But I would argue that they are, for the following reasons:
- Digital adoption has accelerated between February 2020 and now, and the trends are unlikely to reverse. I believe that tech companies like Apple are better positioned today, in a remote and stay-at-home economy, than they were 18 months ago.
- Interest rates have declined sharply. When they do, valuations tend to climb naturally, more so in the case of tech and growth stocks.
- Prior to Apple’s killer fiscal second quarter, the stock’s forward P/E reached a much richer 30 times: share price of $134 and projected EPS of $4.45. Compared to the recent past, therefore, Apple stock seems to be conservatively valued now.
The Apple Maven’s conclusion
Back to the question posed in the beginning: is Apple stock a buy or a sell at current levels? To be clear, I do not know for sure since I cannot predict the future. But based on historical share price and valuation data, I find it easier to argue that Apple is a long-term buy here, rather than a sell.
How about you, do you feel comfortable buying Apple, despite lack of share price firepower? I asked Twitter for their take on it, and here is what they had to say:
Read more from the Apple Maven:
(Disclaimers: this is not investment advice. 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)