Value trap

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Apple Is NOT a Buy Under $400

Apple (NASDAQ:AAPL) has plummeted precipitously since last fall, off about 45% from its late-2012 peak above $700 a share.

The entire way down, many investors have wondered whether “now” is the time to enter into Apple stock and ride a (theoretical) recovery in shares once the dust settles.

But after Apple plowed through the $400 mark intraday Wednesday, traders better look out. This could be the beginning of a bigger breakdown in AAPL over the next several weeks.

Here’s why:

Support at $365: A few days ago, there was chatter about $420 or so being the floor level for Apple stock. Now that mark has been breached, the chart-watchers out there are looking to the ballpark of $365 to complete the next downward move in a yearlong head-and-shoulders pattern. So while $400 is a nice round number … it’s just a stop on this ride.

Earnings pessimism: It’s not just the black magic of technical analysis here, though. There’s increasing pessimism over Apple earnings that will hit investors on April 23 — because of recent margin trouble and past selloffs associated with earnings, sure, but also because a recent report of soft Foxconn sales is rattling Apple stock. It’s natural to think that softness at its No. 1 China partner would result in softness for AAPL, too.

Future market share: Stock prices are inherently tied to the future. And it’s hard to see why the future is brighter for Apple than the past. Sure, the company is rumored to be launching a budget iPhone and there’s hope for a deal with China Mobile (NYSE:CHL) to increase its footprint in Asia. But those moves aren’t very lucrative and continue to tell the story of eroding margins. And while Google (NASDAQ:GOOG) Android has been dominant globally in smartphone market share for a while, the open-source OS is poised to take over the tablet market too and unseat the iconic iPad. Whether it’s Google’s own Nexus line of tablets, the Amazon (NASDAQ:AMZN) Kindle or the Samsung (PINK:SSNLF) Galaxy, there are lots of slick tablets out there providing a viable alternative to Apple at a cheaper price. So without margins and with fading reach … you understand the rough outlook.

I remain convinced that Apple has a future and may not be a bad long-term play, especially considering that at $400 the dividend is over 2.6%. Another 5%-10% drop coupled with a dividend increase could mean a pretty compelling case for Apple stock in buy-and-hold portfolios. Given tremendous cash flow coupled with $140 billion in cash and investments, you can be guaranteed a few decades of dividends even if shares languish.

But there’s no reason to catch this falling knife now. Given the volatility, the only question you really need to ask yourself is whether buying Apple stock today is your only opportunity to enter AAPL around $400.

Chances are there will be plenty of up and down in the next few months — especially if the broader market takes a turn for the worse — so there’s no compelling reason to buy.

Simply sit back and watch the fireworks in Apple stock for now.

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Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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