Following a “mini flash crash” in the last 10 minutes of trading on Tuesday, May 18, Apple stock (ticker $AAPL) dipped by more than 1% for the day once again. This was Apple’s fifth day of losses in the past seven trading sessions, as share price remains stuck at late August 2020 levels.
Keep an eye on valuation
Forward price-to-earnings, or P/E, is a popular and helpful valuation metric to track.
The ratio compares the stock’s current price to the company’s expected current-year or next-year earnings per share, or EPS. It represents how many years’ worth of earnings the market is willing to pay on shares of equity. The lower the figure, the cheaper the stock, and the more appealing of a buy it is.
Apple’s projected current-year EPS is $5.20, suggesting a forward P/E of exactly 24 times at the current stock price of nearly $125. This is the lowest multiple at which Apple stock has been valued compared to 30, 60, 90 days ago and this time last year. See chart below.
In addition, AAPL’s P/E premium above the S&P 500’s comparable ratio (orange dots above) is also currently about as low as it has been in the past 12 months: 3 turns higher than the broad market today vs. more than 7 turns one quarter ago and around 3.3 turns in May 2020.
Based on P/E alone, therefore, Apple stock is looking particularly attractive at current levels compared to its own 12-month history and the S&P 500.
Updates to EPS growth
A close cousin to P/E, another metric that could signal a buy of Apple stock is the company’s projected earnings growth trends. Compared to fiscal 2020, current year EPS growth estimates have been increasing progressively this year: 59% year-over-year today vs. 36% three months ago.
Some might choose to look a bit further out in the future – say, five years from now. Even so, growth rates have been trending in the right direction: currently at 13.4% annualized through fiscal 2025 vs. around 11% as of the beginning of 2021.
Should earnings growth expectations continue to rise, this could be yet another indication that Apple stock might be worth owning at current prices, as the business fundamentals continue to improve.
Will shares trend again?
The third and final metric that might be worth monitoring are the stock’s moving averages. These are indicators that technical analysts (also known as chart readers) like to track to determine things like support, breakout patterns, etc.
At a high level, the following interpretations of moving averages tend to be consensus among analysts:
- A stock that breaks through the averages on the way up is usually believed to be trending in a bullish manner. The opposite is true when share price moves below the averages.
- A stock that moves lower but not past the moving averages is believed to have found support.
- A stock that cannot move above the moving averages is believed to have met resistance.
A couple of interesting observations can be made from the chart above. First, the 50-trading day moving average served as a great buy and sell “advisor” between May 2019 and this time last year. During this period, AAPL clearly moved in trending patterns.
Investors would have done well if they had paid close attention to the orange line above and:
- held Apple stock through February 2020;
- sold it once the share price dipped below the 50-day average, that same month;
- bought back once the stock breached the average on the way up, in April 2020;
- held again until September 2020.
But after the third quarter of 2020, Apple stock seems to have traded sideways and choppily, except for a brief bullish period between November and January. Now, shares trade very much at the conversion point between the 50-day and the 200-day moving averages. Will the stock break out in either direction, finally catching another wave higher (or lower)?
Also pay attention to the grey line above. Notice that Apple stock price has bounced off the 200-day moving average consistently over the past two years. Now seems to be another pivotal point: will shares find support at the 200-day mark once again?
