Can Apple Break Higher?

With shares of Apple (NASDAQ:AAPL) trading around $529, is AAPL an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Apple designs, manufactures, and markets mobile communication and media devices, personal computers, portable digital music players, and a variety of related software, services, peripherals, networking solutions, third-party digital content, and applications. The company’s products and services feature the iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud, and further accessory, service, and support offerings. Apple also delivers digital content and applications through its iTunes, App, iBook, and Mac App stores.

Billionaire activist investor Carl Icahn said he saw no reason to keep demanding that Apple increase its stock buyback plans, citing the company’s recent stock repurchases as well as an influential proxy adviser’s call against his proposal. In a letter to Apple shareholders on Monday, Icahn wrote that he had decided to ditch his nonbinding proposal, “especially when the company is already so close to fulfilling our requested repurchase target.” For months, Icahn has been asking Apple to boost its plans for a stock buyback program, proposing it give back $50 billion more. On Sunday, Institutional Shareholder Services Inc. recommended that shareholders vote against Icahn’s proposal, saying such a motion would “micromanage” how the company uses capital.

Icahn wrote that, “In their recommendation, ISS points out, and we agree, that ‘on the spectrum of options for allocating capital, the board appears to have been sluggish only in returning excess cash to shareholders,’ and even though the company has in place ‘one of the largest buybacks in history,’ we agree with ISS that this effort seems ‘like bailing with a leaky bucket’ when ‘given the scale of the company’s cash reserves.’” Apple Chief Executive Officer Tim Cook told the Wall Street Journal last week that the company had repurchased $14 billion of its stock in the two weeks since it reported disappointing first-quarter results.

T = Technicals on the Stock Chart Are Mixed

Apple stock has struggled to make significant progress over the last several quarters. The stock is currently surging higher and looks set to continue this path. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Apple is trading between its rising key averages which signal neutral price action in the near-term.

AAPL

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Apple options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Apple options

22.55%

6%

3%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

March Options

Average

Average

April Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Apple’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Apple look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

5.00%

-4.73%

-19.85%

-17.97%

Revenue Growth (Y-O-Y)

5.65%

4.19%

0.86%

11.27%

Earnings Reaction

-7.99%

-2.49%

5.13%

-0.16%

Apple has seen rising earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Apple’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Apple stock done relative to its peers, Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), BlackBerry (NASDAQ:BBRY), and sector?

Apple

Google

Microsoft

BlackBerry

Sector

Year-to-Date Return

-5.55%

5.08%

-2.26%

34.01%

6.82%

Apple has been a poor relative performer, year-to-date.

Conclusion

Apple strives to provide innovative products and services that consumers and companies love to own. Billionaire activist investor Carl Icahn said he saw no reason to keep demanding that Apple increase its stock buyback plans. The stock hasn’t made significant progress in the last several years, but is currently surging higher. Over the last four quarters, earnings and revenues have been on the rise. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, Apple has been a poor year-to-date performer. Look for Apple to OUTPERFORM.

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