I’ve been getting a lot of requests to analyze one of the most popular stocks in recent years, AAPL.
At the end of 2018, the stock saw a massive pullback and is right now trading about 25% below its all-time highs.
Should you buy this dip? Let’s find out… by applying my MSFTs filter.
Current macroeconomic forces are working heavily against Apple.
The global economy is slowing down, which hurts cyclical stocks like consumer electronics.
Furthermore, most of the world, including the United States, is late in the economic cycle. Recession signals are blinking red, which means economic growth is unlikely to pick up soon.
Another critical issue is the rise of trade protectionism.
Whether you agree with President Trump’s policies or not, the fact is that the United States has open trade rifts with two of its main export partners—China and the European Union. Moreover, the heavily contested NAFTA agreement still needs approval by the anti-Trump Congress.
And it’s not just the United States and its trading partners at odds. Protectionist trends are also dominating Brazil, the United Kingdom, and India.
Apple exports more than two-thirds of its products, and additional tariffs directly impact the company’s bottom line.
For macro forces to benefit Apple, the United States would need to successfully resolve all its trade disputes while keeping interest rates low. This could spur further economic growth.
AAPL Macro Conditions: Fail
The sector story is mixed, with strong arguments both for and against Apple’s business model.
On the positive side, the numbers of smartphone users around the world are increasing. Forecasts predict the number to grow a further 27% over the next three years.
Moreover, most countries will introduce 5G technology in 2019 and 2020. This will represent a new milestone in the digital revolution, and consumers will have to adapt. This will mean buying a new 5G smartphone.
On the negative side, most users around the world can’t afford the high iPhone price tag… and Apple keeps on increasing it.
The iconic smartphone represents around two-thirds of the company’s revenues, and, unless management introduces lower-priced models, they will have a hard time attracting new smartphone users.
Another issue to watch out for is the U.S.-China cybertheft situation.
Washington has banned Huawei from selling some of its equipment in the United States in the interests of national security. If the ban extends to Huawei’s phones, as Trump is threatening, I expect Beijing to retaliate in kind, banning the United States’ largest phone maker, Apple.
AAPL Sector Potential: Neutral
I like Apple’s fundamentals. The only thing that sounds any alarm is the high debt-to-equity ratio—especially as it’s growing. It has tripled in only four years and now stands at 97.32%.
In the current environment, I prefer companies that are lowering their debt levels, not increasing. Interest rates are rising, and, with them, the cost of servicing debt. Moreover, with the economy slowing, revenues of cyclical companies like Apple will fall, and interest expense will become an even greater burden.
However, while Apple’s debt levels are high, I am not worried about any near-term default. The company has an interest coverage ratio of 23.50, meaning EBIT (earnings before interest and taxes) are 23.50 times higher than interest costs.
Generally, I consider defensive stocks with interest coverage ratios higher than 3 to be safe, while the number should be at least 6 for cyclical stocks such as Apple.
Other than the debt levels, Apple’s financials are solid.
AAPL Fundamentals: Pass
Apple’s stock went through a massive pullback at the end of 2018, declining by about 40%. Since then, it picked up and is now trading about 25% from its all-time highs.
If you look back over the last 10 years, you see that AAPL has survived substantial pullbacks like this before. Indeed, they have proven to be good opportunities for buying the stock. If you’re a long-term investor and are planning to hold AAPL for 10+ years, then this is an excellent time to enter the trade.
However, if you have a shorter investment horizon, be careful. AAPL is technically in a bear trend. I would wait for a clearer reversal signal, such as a double bottom or an inverted head and shoulders.
AAPL Trigger Price: Fail
Unfortunately, Apple Inc is not a misfit.
It passes only one out of four steps of my MSFTs system.
The stock’s price is fair if you have a long investing horizon. However, in the short- to medium-term, it represents too much risk.
It’s in a downtrend, has limited sector potential, and faces a tough macroeconomic environment. It’s hard to tell which direction the stock will take from here.
I recommend looking for opportunities where the chances of the stock price increasing are more than 50%.
I invented the MSFTs system for that purpose specifically.