Yesterday I posed the question: Should investors dump Apple shares? (AAPL) – Get the Apple Inc. report. at $155 before this sale got any uglier? On the same day, the AAPL fell to around $150 in the early afternoon, suggesting that caution was the right way to play this hand in the very short term.
But this coin has two sides. Yes, Apple stock seems to be clearly in a downtrend, along with the rest of the market. Due to a combination of high inflation, rising rates, supply chain challenges and the Russian-Ukrainian conflict, the uptrend is nowhere to be found.
However, history suggests that AAPL becomes a more attractive buy when the stock digs a deeper hole. Today, I look at historical trends to argue that now could be a good time to start buying Apple stock – provided investors have enough time and patience to see a turnaround.
(Learn more about Apple Maven: Apple stock: dump to $155 before it gets ugly?)
The story says: buy the dip in AAPL
The case for buying AAPL stock today is illustrated by the chart below. It represents the annualized return over a three-year period, if stocks are bought at certain levels below historical highs: not in a 10% correction, in a correction or in a bear market (i.e. more 20% decrease).
The key takeaway is simple: Investors who could afford to wait three years did better when they bought AAPL on the downside. The larger the drop, the better the future performance.
The more subtle conclusion from the graph above is that there is a linear relationship between future returns and past declines. That is, buying a small dip is usually a good idea, but buying a bigger dip was an even better decision.
Currently, Apple stock is down 17% (using the noon price from Monday, March 14). Another bad day or two, and AAPL could enter bearish territory. Bargain hunters should pay attention.
When AAPL collapses
There is one important observation that is not described above. The best gains, by far, occurred when Apple stock plunged very deep into the bear market – a correction of 50% or more. In the age of the iPhone, this only happened once: during the Great Recession of 2008.
After correcting over 50%, Apple produced average annualized returns of 68% over the next three years! Going back to the 1980 IPO, those returns would have been 45% per year, smaller (but still phenomenal).
It’s hard to say whether Apple stock will correct as much this time around. But if so, the story says to back up the truck and buy as many shares as you can.
The Key Assumption
Buying the dip has proven successful in the past for one main reason: Apple stock eventually recovered from a dip. This happened because the company became a dominant force in consumer technology devices and services.
Buying dips probably wouldn’t work in the future if Apple’s business were to deteriorate significantly. So, dip buyers need to have confidence in the fundamentals of the Cupertino company.
The good news is that, in my opinion, Apple is about as strong today as it has ever been. The expensive iPhone has become a staple around the world. The Mac is pretty much the most sought after PC out there. The App Store has become a necessity in today’s app economy.
For the reasons above, I would consider buying AAPL at current levels, assuming I have the patience to hold my stock for a few years.
(Disclaimer: This is not investment advice. The author may own one or more stocks mentioned in this report. Additionally, the article may contain affiliate links. These partnerships do not do not influence editorial content. Thank you for supporting The Apple Maven)