Apple: Trading the Correction

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Whether driven by the disruption in China, rumors over iPad mini delays or simply because the stock had run too far too fast, Apple (NASDAQ: AAPL) officially closed in correction territory during Thursday’s session, down over 10% from its recent all-time high above $700. Since the stock touched its historic high, I have been arguing that the meteoric rise was overdone and in need of some type of correction. While this opinion was not well-received by the Apple faithful, now that it has come to pass, it is time to consider if the stock has dipped sufficiently to make it a good buy yet. Ultimately, while I like the company’s upside from here, recent missteps suggest that a more favorable entry point may still be on the horizon.

The China Problem

In response to multiple stoppages at a Foxconn Technology plant in China that serves as a major cog in the iPhone supply chain, Tim Cook recently visited the location in an attempt to quell the mounting issues. Workers at the plant have claimed that they have been subjected to unfair labor practices and caused productions problems on multiple occasions. While the first issue was easily dismissed as a minimal hiccup, problems have persisted. These issues are not only detrimental to Apple’s production efforts, but have the potential to explode into a labor relations disaster, depending on the ultimate extent of the labor practices in question – the conditions have been blamed on multiple worker suicides over the past several years.

The issues are important not only to Apple’s ability to produce devices for sale in the U.S. and Europe, but the situation has the potential to define the relationship between the company and China, which has become Apple’s second largest market. This may also serve as one of the first major tests for Tim Cook since his taking over the top spot. While Apple will almost certainly resolve these problems eventually, the manner and timing of the resolution has importance as well.

More Release Rumors

Just as iPhone 5 release rumors have been put squarely in the rear-view mirror, speculation over the release of the expected iPad mini is taking center stage. Apparently the invitations to major media outlets that were expected to be sent out, welcoming attendees to an event planned for later this month, have yet to be put in the mail. While no official release date was ever announced, the news will likely be interpreted as a rare Apple miss in hitting one of its own targeted release dates.

There is still plenty of time for the smaller version of the popular iPad tablet to make it onto shelves ahead of the official opening of the holiday shopping season, but Apple will be well advised not to let the release date fall too far into November. With competing devices including the Google (NASDAQ: GOOG) Nexus 7 and the Amazon (NASDAQ: AMZN) Kindle Fire HD gaining some traction, Apple needs to manage its product line with care. Both Google and Amazon have performed well over the last few weeks and look very strong heading into the fourth quarter.

The Trade

While Apple’s selloff represents a full 10% from its recent high, I think there is still room left on the downside. The negative news that Apple is facing is not likely to do permanent damage, but it may be sufficient to allow the stock to give back another 5%, or $35, from its high. Investors who are afraid of missing the ultimate continuation higher may not wish to wait, put I believe a targeted entry point at or below $600 is still in the realm of possibility. Whether you choose to wait for a more attractive entry point or not, Apple is getting the correction it needed in order to go higher. Any significant positive catalysts at this point should be seen as immediate buy signals and acted upon accordingly.


Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Amazon.com, 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.

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