Why Apple is Set to Bottom

Apple AAPL has been the darling stock of every investors eye since its meteoric rise began in 2009. Rising from a low of $78.20 on January 20, 2009 to a high of $705.07 on September 21, 2012, many investors have made a lot of money just simply holding the stock. However, recent performance has been much more lackluster.

Since reaching its all time high and becoming the largest U.S. company ever by market cap, Apple has fallen sharply. Currently, the stock is trading near $540 per share, about 24 percent lower from its intraday high and the lowest level since the beginning of March. However, there may be some good news for the stock and investors who missed the earlier rallies may now have a chance to get in.

Looking at the chart below, Apple has had seven significant bottoms over the course of its longer-term uptrend. The first occurred in February 2008, and although that was before the meteoric rise, one would think that without the Great Recession, the rise would have began sooner. The most recent bottom occurred on May 31, when the stock reached $560.99 before rising to all-time highs in September.

One pattern arises when looking at the chart, specifically when compared to analyst price targets. The consensus price target for Apple has grown from $209.29 in November 2007 to $763.63 currently, and one analyst at Topeka Capital Markets even has an astounding $1,111 price target on the stock. What is interesting is the spread between Apple's actual price and its average price target. On the seven occasions that Apple bottomed, the spread between the price target and the actual price averaged 31.2 percent.

This is intriguing for one reason: Apple is currently trading 29.75 percent below its price target. If it were to fall to the average level, the downside risk is only to $525 per share, where there is significant technical support from the long-term trend-line as shown below. Of course, the broad market will be driven by headline risk for the next several weeks as the Fiscal Cliff and European woes hang on markets. However, recall in May when stock indexes for falling and Apple bottomed earlier and led the market higher.

Thus, it may be the time to look to get in to Apple, to add to positions, or to maybe even buy some calls for those looking for a cheaper alternative than buying the stock at $540 per share. Also, the stock is only trading at 10.94 times earnings, well below the average of the S&P 500 near 14 times earnings. Also, the company has a staggering $121,251 million in cash and cash equivalents on its balance sheet, or $128.89 per share. If you back this large cash position out of the stock price, Apple is only trading at 8.25 times next year's earnings.

So, Apple looks attractive based on all of these metrics. And just FYI, the stock has risen $5.00 since I started writing...

Disclosure: I am long Apple shares.