Apple Stock Mystery -- Death Cross, Capital-Gains Tax Rates and a Real Oddity: PE Ratio

Apple (AAPL) investors have a lot to worry about these days, what with wild share-price drops coming often and a roughly-20% decline in the past three months alone. The market is atwitter in speculation about why this darling is suddenly a loser, and it’s enough to make any investor lose sleep at night. So in an effort to cut down the noise, we offer here a couple of popular explanations that long-term investors should feel free to ignore.

The Cross, Death, Golden or Otherwise

Lots and lots of market watchers blame technical factors for Apple’s share price fall. Chartists see a “death cross,” or perhaps a sign of the Great Satan or Blair Witch or something else we don’t, because we look at fundamentals instead of long-term moving averages and share-price support levels. Day traders have at times made great money reading doom from share price charts alone. But even if such technical analysis proves predictive of a short-term price movement, no one is going to care that it happened three years from now.

Profit Taking, Because Who Wouldn’t, looking at an Apple stock chart?

AAPL Chart

AAPL data by YCharts

Profit taking also gets bandied about as a big factor in Apple’s slide, and this is surely true. Apple’s share price more than quadrupled between September 2008 and September 2012, and it was up 70% in the first nine months of 2012 alone. Who wouldn’t want to take some profits from that at a time when future capital gains taxes and the abilities of Congress to act sensibly in the near future are pretty damned uncertain? It’s hardly reflective of long-term problems at Apple.

We can be blithe about such threats mainly because there’s little in Apple’s share price now to suggest it’s overvalued. If Apple were a fast-growing company, valued as many of those are at 30 times earnings or more, a correction in the share price down to more ordinary levels would be cause for concern. But Apple shares are already there. They trade at a PE ratio of 12 on historic earnings and carry a dividend yield of 1.9%, while estimates of earnings growth still average more than 20% annually for the next five years. In other words, there’s little to correct and a lot of room for error in the forecasts.

AAPL PE Ratio TTM Chart

AAPL PE Ratio TTM data by YCharts

The biggest threat to Apple’s share price, as we have discussed in some depth here, is its ability to keep profit margins up while competition builds. That’s an issue for long-term investors to consider. Technical factors, profit taking; in the long run, that stuff is just a lot of noise.

Dee Gill, a contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine.



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