After a period during which Apple seemed like it could not do anything wrong, leading up to the stock's record high of $705.07 on September 21, the company has entered a stretch where it can't catch a break. Few stocks are as widely covered, and few evoke the depth of emotion or the ferocity of opinion as those hailing from Cupertino. When both the direction and breadth of coverage are considered, an interesting trend can be discerned: the dominant opinion present in current coverage tends to be a lagging indicator that favors the contrarian position.
In simpler terms, when the financial media is screaming, you should at least consider doing the opposite. There is nothing either scientific or rigorous in this observation, but if you trade or follow Apple, the anecdotal appeal may be compelling. Based on this indicator and other factors, Apple is a buy at current levels.
Opinion's volume and direction
To begin this discussion, I would direct you to read David Wismer's piece, "What The 'Experts' Are Saying Now About Apple Stock." The article highlights the positions of many of the most highly-regarded Apple analysts and commentators, but with the ultimate conclusion that, as Apple shot to $700, the prevailing opinion was that the stock could run ever higher; since the reversal, he notes, this consensus has dramatically reversed.
Furthering the thesis of taking a contrarian approach are comments offered by Aaron Task of Yahoo! Finance:
Generally speaking, when a company is being vilified in the popular media like this, it's usually closer to the end of a decline vs. the beginning. As Apple bulls like to point out, the stock is cheap, trading with a trailing P/E of 12.3 and a forward P/E of less than 10 based on forecasted earnings for fiscal 2014. Both measures are well below the S&P 500 multiple, even as Apple is growing much faster than the index.
Professional traders have long understood that there is significant evidence available that supports the idea that, as trades begin to get crowded, a reversal becomes more likely. In general, commentators can be divided into specific groups, especially in the case of Apple:
perma-bulls can always find a reason why the stock will rise
perma-bears can always find a reason why the stock will decline
momentum traders follow the trend
contrarians fight the trend
realists attempt to make sound judgments and trade accordingly
The humorous or tragic reality, however, is that every market participant believes that he or she is a member of the final category. Realistically, does the Apple fan whose investment thesis centers around the idea that "people buy iPhones because they're cool," have any more grounded a basis to own Apple than the Google Android shareholder who sincerely sees no design similarity between Samsung products and Apple's?
The proponents of Amazon and Microsoft are equally susceptible to this type of behavior, but the breadth of Apple coverage makes an investigation into it a bit more straightforward. The ability of opinion to develop market moving inertia is only limited by the existence of true fans of a given company.
Using this information
The opinion engine tends to operate like a large steamship -- it takes some time to produce solid movement in a given direction and, once that motion is created, changing course is a slow process. It is this difficulty in changing course that makes this a lagging indicator that has no hope of keeping pace with the changes possible in a stock's price. I believe that it can be a useful tool as part of your analysis if it is used properly -- when coverage on a given stock gets too one-sided, you should become skeptical and dig deeper.
Applying it to Apple
Using the above to give some contextual reference, we can now begin to consider the central question: Is Apple a buy, or is the company in trouble? Friday saw Apple shares fall even further, as UBS analyst Steven Milunovich lowered his price target on Apple from $780 to $700 , citing a tepid Chinese release of the iPhone 5, and concern that sales of the iPad Mini may eat into sales of the larger iPads. Additionally, Jefferies analyst Peter Misek lowered his 1Q13 sales estimates for iPhone sales, from 52 million, to 48 million, citing initial reports that Apple had reduced orders with most of its major suppliers.
These are just the most recent news items that have helped drive down shares of Apple by 27% since their historic high. The news had turned decidedly grim, with even the perma-bulls less vocal than usual. Ultimately, Apple appears to have limited downside risk from its current level and continuing strong metrics - but some have gotten softer of late. As an increasing number of investors become disheartened with shares of Apple, using the above indicator, the stock's appeal should be on the rise. Based on opinion, fundamentals, and limited downside, Apple is a buy at current levels.
There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy, and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.
The article What Is Apple's Problem? originally appeared on Fool.com.
Fool contributor Doug Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Amazon.com, Google, and Microsoft. 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.