Apple is bouncing today on the news that Warren Buffett has invested $900 million in the company. For Warren Buffett Apple ticks most of the boxes that he likes to see: solid dividend yield, consistent growth and reasonable valuations. Plus, it is the largest individually traded stock so even at around a $1 billion investment that is still only about 1/4 of the average daily $ volume traded. There is a reason why Berkshire Hathaway’s largest equity holdings are in some of the largest companies in the world (i.e. Wells Fargo, Coca-Cola, IBM, etc). When you have tens of billions of dollars to invest, there are only so many options out there if you want to take a concentrated position without taking over majority control. For all of those investors, however, that aren’t constrained by massive amounts of investable cash (unfortunately!), we believe that there are better options available than Apple at the moment.
The reason why we wouldn’t be quick to buy the dip in Apple is that the overall trend looks awful. There is really no other way to put it. First, lets look at how Apple looks relative to the stock market (in this case the MSCI All-Country World Index). Apple is testing a support line that has been in place since 2013. Even if this support line holds, there is a lot of overhead resistance nearby which limits Apple’s upside. More likely, this support fails as it seems Apple is putting on the finishing touches of a topping formation that has been forming over the past 18-24 months.
On an absolute basis, Apple’s point and figure chart looks even worse. It has broken down through the high performance support line that was in place since 2013. On Friday, it broke down further and signaled a triple bottom sell formation. This a very bearish signal especially considering the downtrend that has been in place since late last year. The current best case scenario in our opinion is Apple reverses the recent downtrend and finds support at current levels. In this case, we would expect Apple to remain range bound and we would not expect it to enter a new bullish phase for quite sometime. The more likely scenario, however, is further weakness is in Apple’s near future and a 12.5%-25% decline is likely and a 50% decline is not out of the question. Apple is always worth watching as it is the largest stock in the world. However, keeping a close on it now is even more important as it seems to be at an important inflection point.