Apple Inc. Stock Is Poised for a Pullback After the ‘Buffett Bump’
Shares of Apple Inc. (NASDAQ:AAPL) broke out to fresh new all-time highs Friday. Apple stock rallied nearly 4% to close at $183.93 on news that famed investor Warren Buffett had added to his rather sizable stake in Apple.
While I am certainly not one to scoff at the investment prowess of Buffett, or the buyback and dividend increase Apple announced following tepid earnings, I do feel Apple stock has come too far, too fast.
AAPL is poised for a pullback.
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On a valuation standpoint, Apple is trading just below an 18 price-earnings ratio, nearing the richest multiple over the past five years. It is also trading at a massive premium to the five-year average P/E multiple of 14.1. Other metrics, such a price-sales, price-book and price-cash-flow are also trading at extremes to their five-year averages.
Apple’s stock is certainly no longer cheap at current prices, especially considering that growth will necessarily be slowing simply due to Apple’s $900 billion market cap. The law of large numbers definitely applies.
From a technical perspective, Apple is also trading at extremes after breaking out past the $180 resistance level.
Nine-day RSI is now well over 70 and at readings that marked significant short-term tops in the past. AAPL is also at a huge premium to the 30-day VWAP (variable weighted average price) of $175.61.
Previous times that Apple stock traded far above VWAP also proved to be a sign of over-exuberance. Since VWAP is a favorite metric used by companies when buying back stock, I expect stock buyback activity to be greatly lessened until Apple stock pulls back toward that level.
Apple options are getting cheap, especially on a comparative basis. Implied volatility (IV) is now at only the 32nd percentile and is also trading very cheap when compared to the historical volatility at the 82nd percentile. This favors long volatility strategies when constructing trades.
In my previous post on Apple from April 23, I had a positive outlook on the stock and recommended a bullish put credit spread with AAPL at $165.72. Now that Apple has rallied 16% my outlook has been tempered because price does matter. So to position for a pullback in Apple, a put calendar spread makes probabilistic sense.
AAPL Stock Trade
Buy AAPL June $180 puts and sell AAPL May $180 puts for a $1.80 net debit.
Maximum risk on the trade is $180 per spread. Ideally Apple stock closes near the $180 level at May expiration, which is just a 2% pullback from current levels. The $1.80 net debit equates to less than 1% of the closing price of AAPL shares.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
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