Trading Apple’s Correction
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since the release of Apple’s (NASDAQ: AAPL) iPhone 5, I have recommended waiting for the stock to correct before establishing a position. When the stock breached the $700-level, despite its continuing strong metrics, the company was due for a breather. While this position drew the extreme ire of the Apple faithful whose comments ranged from polite dissent to irrational outrage, as the stock dips below $660, one must wonder if the correction is finished or just beginning. Ultimately, Apple has significant upside over the medium-term, but the stock can still afford to stabilize a bit lower before heading back for the stratosphere.
While it is hard to pinpoint a specific cause for the current selloff under way in Apple’s stock, one of the few criticisms which has been levied against the new iPhone is the problems that users have experienced with Apple Maps. Essentially, the accuracy of the app’s ability to properly locate various venues has been called into question based on the experience of various testers. Here again, the Apple faithful have flooded in with reports that Apple Maps works just fine, making the takeaway that the problems are idiosyncratic at worst. The real concern is that in the post-Jobs era, Apple may not be as careful or exacting in its standards as it was under the founder’s stewardship.
A response to concerns over the Maps glitch points out that when compared to Google (NASDAQ: GOOG) Maps, the Apple version uses a fraction of the memory and data. While this may be the case, if the app cannot get you to your location, its data usage is somewhat irrelevant. This is one of those instances where without the proper result, the path is not worth discussing.
Where the Map Takes Us
Perhaps the greater takeaway from the degree of attention that the Apple Maps situation has drawn is that if an issue that will be soon corrected can inspire so much conversation, the device itself must be fairly solid. This is not to suggest that the issue is completely lacking in substance, simply that is resides somewhat in the periphery of the overall iPhone 5 experience. If we carry this logic a bit further, it suggests that the selloff in Apple stock is not an indicator of a real problem with the company, but rather the needed correction that will allow it to ultimately climb even higher.
The fact that Apple is down against a backdrop of an unexpected drop in the unemployment rate further underlines the true dynamic of the decline. On a day on which the broader market is hitting multi-year highs, Apple is leading tech companies lower. This also suggests that the decline is a correction and not a reversal in the strong uptrend in the stock. While the Apple faithful would like to believe that the stock can go straight up, this is simply not the nature of things.
Trading Apple at Current Levels
While there is a real temptation to jump into Apple with each successive decline, patience will likely be rewarded. From $700, a 10% correction is a reasonable target, making $630 an appropriate entry point. If you are concerned about missing significant upside, $650 may be a more comfortable entry point, as it represents an important psychological level as well. On the more aggressive side, $600 is another important psychological level and represents a decline of roughly 15% from the stock’s recent high.
While investing is ultimately about finding long-term holdings that perform, making smart decisions about when and what to buy is an important part of the process. Apple remains a dominant player in its space, but the current correction is a much needed part of its ultimate success. While the company moves towards stabilization at lower levels, it remains too soon to initiate a new position.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.