Is Apple's Stock Split the Sign of a Top?

Apple splits its stock -- does it matter?

Jun 9, 2014 at 10:15AM
Longview

After finishing last week at another record high (the eighth in the last 10 trading sessions!), U.S. stocks are little changed on Monday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) both up about 0.1% at 10:15 a.m. EDT. As broad market valuations become increasingly stretched -- the S&P 500 is now at 15.1 times the next 12 months' earnings per share and 25.9 times cyclically adjusted earnings per share – it's imperative to look individual stocks for truly compelling value (though even this task is more challenging).

Images

If you're an Apple (NASDAQ:AAPL) investor, don't be alarmed by the stock quote this morning: The shares have not lost 85% of their value; instead, they've done a seven-for-one split (i.e., where you owned one share, you now own seven; the same goes for all other investors and the total number of shares outstanding is multiplied by seven).

Apple's stock has been on quite a run since it announced the share split on April 23, rising 23% through Friday against 4% for the S&P 500; the stock also achieved a 52-week high on Friday. Is that too far, too fast? Over the weekend, the venerable Up and Down Wall Street column of Barron's noted that:

...based on history, splits in Apple's stock have coincided with peaks. ... The previous three Apple splits -- on April 22, 1987; April 19, 2000; and Feb. 11, 2005, all were followed by tops within the next three to 10 trading sessions. Within a month of the split, Apple's stock fell back to its 50-day moving average. As of June 2, that was $568 [equivalent to $81.14 post-split] and was rising $2 a day.

However I think the split is not a sign of a top in the shares.

First, as a general remark, it's worth repeating that the split has absolutely zero economic impact.

Second, as Barron's rightly pointed out, there were other things going on in 1987 and April 2000 that affected the stock market broadly.

Third, the stock split is an inconsequential event in a period that has been rich in news concerning the world's most valuable company. Indeed, Apple announced the split coincident with its fiscal second-quarter earnings release, which substantially exceeded Wall Street's expectations and included a large increase in the company's capital return program. The one-day reaction in the share price to the earnings release on April 24 (+8.2%) accounts for more than a third of the cumulative share price increase since April 23.

In addition, Apple's Worldwide Developers Conference was held last week -- during which the stock rose another 2%. Although no new hardware products were unveiled, the focus on new operating systems for the Mac and the iPhone/iPad was well received (see my Foolish colleague Tyler Lacoma's analysis of the highlights of Apple's WWDC.) Not to mention that Apple also announced first ever 10-figure acquisition, premium headphones and streaming music company Beats Electronics.

Finally, because the short-term behavior of stock prices is essentially unpredictable, it's always worth grounding oneself in notions of business fundamentals and intrinsic value. At 13.5 times estimated fiscal year 2015 earnings per share, Apple shares don't look overvalued. The run-up since the end of April has simply helped align the stock price closer to its intrinsic value after a period during which negative sentiment caused it to overshoot to the downside. As such, there is little reason to fear a downside correction from the current level -- even if it were to occur.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers