|by Wes George
Apple's Big Break Out
March 6th, 2000
If one advances confidently in the direction of his dreams, he will meet with a success unexpected in common hours.
"At this time, we are maintaining our FQ2 estimates of $0.78 a share, $1.95 billion in revenue, and 1.05 million (unit) shipments, but Apple is poised for a strong March and we see the new products driving upside to our estimates." With those immortal words, Kevin McCarthy of Donaldson, Lufkin and Jenrette launched AAPL to new heights. Or so say the headlines
McCarthy's opinion became news Wednesday morning before the bell as Maria Bartiromo on CNBC, with the type of urgency that only she can muster, frantically reported DLJ's "robust" call on Apple and that's all the stock needed for the big break out. AAPL gapped up $4 on the opening and soared to $132 intraday and closed at $130.3 for $12.5 gain, Apple's biggest single session gain ever. AAPL closed up $18 for the week, making it the second best weekly performance everthe best was last December.
The funny thing is that McCarthy's statement was hardly even news. He didn't issue an upgrade and all along Apple has maintained that they'll make $0.80 per share this quarter. DLJ only needed to look at the guidance from Cupertino, or First Call, to see upside to their estimates.
What really happened was that AAPL was wound tightly like a spring with a hair trigger lock holding it in place. The first kind words from a respected analyst, like DLJ's Kevin McCarthy, was enough to trip the firing pin and launch APPL to a new trading range. I cynically predicted as much would happen two weeks ago.
Nevertheless, that 1.05 million units could ship this quarter is an exciting prospect considering Apple hasn't had two consecutive quarters of above a million units moved since 1996. Moreover, strong sales in a normally weak quarter would consolidate the upward trend in unit ships, perhaps convincing cautious money on the sideline to take a position. Revenues forecast at $1.95 billion also show a strong uptrend from last year's FQ2's $1.5 billion.
Apple has consistently beat First Call's and their own earnings estimates since FQ1 1998, on average by 14% in the last 6 quarters. That's excluding FQ2 and FQ3 of 1998 when Apple was in rebound mode and beat estimates by 51% and 123% respectively. Last year's FQ2 earnings estimates were about 20% lower than this year's at $0.57 per share and Apple beat that number by 5.3% for $0.60 per share. Remember, this is the weakest quarter of the year for consumer computer hardware sales.
Sell or Hold?
Ah, the sweet lucre of success! What a week for Apple shareholders. The big question this week must be should one hold or take some short term profits?
Investors should hold because typically, after an ascending triangle break out, a stock will resume the previous uptrending ascent that it had before the consolidation period that the ascending triangle formation represented.
Even the worst case technical scenario is now bullish: Last month resistant in the 119 range is today's support and no clear resistance level has been established for the upside range. Apple could easily trend above the new high level of $130. We are now 20 bucks closer to a stock split than last weekmore reason to hold for a long-term investor.
Of course, there are fundamental reasons to hold Apple at these levels too. The stock is still undervalued at $128 per share with a miserly PE of 34, still less than the computer industry's average of 38 and much less than the whole technology sector with its average PE of 54.
Value stocks are out of fashiontoday. Tomorrow that could change. First Call conservatively expects Apple to grow at 20% a year for the next five years, which beats the latest forecasts of 18% for the computer industry as a whole.
Apple's growth potential is undervalued. The PEG ratio (P/E divided by the expected growth rate) is a mere 1.59, less than the industry's 2.10 and even less than the market average of 2.62. The higher the PEG, the more expensive the stock.
Apple's Ascending Triangle.
I've received a number of emails hailing me as a brilliant visionary for bolding going where no professional analyst dare tread when I publicly and correctly forecast Apple's break out in advance. While such praise is worth its weight in gold to my ego, the truth is I am nothing more than a humble student of technical analysis. The ascending triangle pattern screaming "Buy Me!" in the AAPL chart was obvious to every fund manager, analyst and stock trader worth their salt.
What I tried to expose in my column about Apple's ascending triangle was the push and pull of supply and demandhow the interaction between buyers and sellers creates particular patterns in a stock's chart that can be read like a book.
In the New Economy stock market where all the old laws of physics seems to have been repealed, or at least gone quantum in nature, I'd like to point out a basic Principle of Uncertainty about stock values.
That is, beyond a corporation's book value, a stock certificate has no intrinsic value whatsoever. The value of a stock certificate is entirely determined first and foremost by supply and demand. In such a universe, technical analysis is an important handle for determining future price action.
Apple's ascending triangle presented me with the opportunity to show-off the power of TA forecasting in real-time action rather than in some obvious post-mortem of a past event.
Kevin McCarthy of Donaldson, Lufkin and Jenrette also used the power of technical analysis in real time to enhance his and his company's prestige with investors. The media reported that McCarthy's remarks are why Apple now trades 15% higher, yet there was no mention of Apple's ascending triangle. While Apple did grace McCarthy with the honor of pulling the lever, the AAPL rocket was already fueled and on the launch pad with all systems go.
Ancient Polynesians used a type of visual analysis of waveforms to navigate. It is said that they could tell by the ocean surface patterns where islands were located beyond the horizon. TA is just such a subtle art form of fractals and trends.
The readings TA offers are nothing more than probabilities that when combined with experience and other outside factors, such as the state of the economy, the market direction and a company's basic financial fundamentals, can help one towards more graceful entries and exits.
Use it or lose it!
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Wes George writes about the financial side of being a Mac nut. Wes has followed Apple's finances for the last 7 years and comes to The Mac Observer every Monday to tell all about his opinions. He is, in his own words, "inordinately fond of money." If you would like to write Wes, make it nice. Someday you might own a company that has something to do with Apple, and Wes will probably still be writing for The Mac Observer...... On the other hand, Mr. George is known to love a rousing, hair-raising debate, so send him your worst!
Disclaimer: This column is for informational and entertainment purposes. While Mr. George may be sage indeed, his writings can not be construed as a solicitation to buy, nor an offering to sell any particular stock. As with any trading in the financial markets, you must use your own judgment to make the best trades that you can. Neither The Mac Observer nor Wes George may be held accountable for trading advice.