Recently, a few friends have asked about buying Apple stock. The reasoning, as far as I can gather, is because the stock is now “cheap.” While it is good to buy things at cheap prices, I would argue that Apple is not “cheap”, but perceived by the retail investor as “cheap” because of the recent 7-for-1 stock split, which brought the share price from above $600 to below $100. A deal, right? I can now get Apple stock for less than $100! Awesome! Freeze! – not so fast. What is really happening here? Let me try an analogy:
One Benjamin for Five Jacksons
As nice as it is to have a $100 bill in your wallet, it’s difficult to use on a daily basis because many stores will not accept them. Therefore, it’s usually best to take that $100 to a bank and exchange it for five $20 bills.
A stock split is a corporate action that increases the number of shares by dividing each share, which in turn diminishes its price. The stock’s market capitalization (the overall value of the equity) remains the same much like the value of the $100 bill is not altered by swapping it for five $20 bills. Five $20 bills still equals $100.
So… Apple has not become “cheap” and is the same in value, but in a different denomination. Why would Apple do this? THIS is the question you, the curious investor, should ask. And the answer should make you think twice about buying Apple right now. So why did Apple do this? Simple. To make the stock appear “cheap” so that more investment dollars will flow in from retail investors like you and me. On it’s face, this not a unique practice and is done by many companies each year. However, be aware that this practice does not make a stock “cheap”, rather affordable. And when you consider that Apple is also well on its way to completing a massive stock buyback program ($130 Billion worth!), it is apparent that Apple is working hard to keep the value of its stock near all-time highs. This buyback program directly affects the price of the stock as they remove shares from the market. This, along with the current price picture for Apple, tells me that the risk is way too high to own Apple stock right here, right now. Take a look at the monthly chart below (which accounts for the split). We are bumping up against resistance from the all-time highs back in November 2012 with a major divergence in momentum. It took a huge buyback program, and now a stock split, to get it here. You can buy Apple stock right here… but you’ll probably be able to get it truly cheaper in the not too distant future.