The past year has been a volatile period for Apple (AAPL) stock, but investors in the tech leader don’t have many reasons to complain. Apple stock has gained almost 25% over past 12 months, and it’s currently trading near historical highs at around $190 per share.

However, past performance does not guarantee future returns, and stocks that perform well can many times become overvalued do to excessive market optimism. With Apple stock trading at all-time-highs, it makes sense to wonder if the best is already in the past for investors in the company or if the stock still offers attractive upside potential going forward.

The following paragraphs will try to answer this question by analyzing Apple stock from a quantitative perspective. Statistical research has proven that quantitative factors such as quality, value, momentum, and relative strength are powerful return drivers for stocks over the long term. Let’s take a look at these factors and what they mean for investors in Apple.

Exceptional Quality

Apple has one of the most valuable brands in the world, and the company’s customers are notoriously loyal to its products and services. Brand differentiation, a reputation for quality, and a deep focus on design allows Apple to charge above-average prices for its products, which also means superior profitability for the company.

Most companies in the consumer electronics industry struggle to make any money, while Apple generates profitability levels that are materially above the competition.

The chart below shows Return on Assets (ROA), Return on Equity (ROE), Return on Investment (NYSE:ROI), Gross Margin, Net Margin, and Operating Margin for Apple versus the average company in the industry. The company is superior to the average across all of the indicators considered.

The most recent earnings report from Apple confirms that the business is doing quite well as of the second quarter of fiscal year 2018. The numbers came in ahead of expectations across the board, Apple did better than expected in earnings per share, revenue, iPhone and iPad shipments, and services revenue.

Importantly, revenue growth has accelerated over the past six consecutive quarters, which shows that Apple can still produce healthy growth rates in spite of its gargantuan size.

Reasonable Valuation

Even a world-class company can me mediocre investment if valuation is too high. But that’s hardly the case when it comes to Apple. The stock is very reasonably priced, if not downright undervalued at current levels.

Apple stock is trading at a price to earnings ratio of 17.3, a substantial discount versus a price to earnings ratio of 20.4 for the average company in the S&P 500 index. Wall Street analysts are on average expecting the company to make $13.27 in earnings per share during fiscal 2019. Under this assumption, the stock is trading at a remarkably attractive forward price to earnings ratio of 14.3.

The company has a net cash position – meaning cash and marketable securities net from term debt and commercial paper outstanding – of $145 billion. In addition, the business is generating $57.3 billion in free cash flow per year.

Management is putting that capital to work in rewarding shareholders via dividends and buybacks. Apple announced in the most recent earnings release a 16% increase in dividends and a new share buyback program for $100 billion.

The stock is not only attractively priced in terms of earnings and cash generation, but capital distributions via dividend and buybacks could be a powerful incentive for value-hunting investors to buy Apple stock.

Solid Momentum

Financial quality is about buying the right company, meaning a business that generates solid revenue growth and attractive profitability. Valuation is about paying the right price for the stock. Momentum, on the other hand, is about the timing in the position.

Financial performance analyzed in isolation doesn’t tell the whole story behind a stock. The numbers in comparison to expectations can have a much stronger impact on stock prices. If the company is doing better than expected, chances are that this will push the stock price higher over time.

Apple has reported better than expected earnings numbers over the past four consecutive quarters. The chart shows the expected earnings number, the actual reported figure, and the difference between earnings and expectations both in absolute and percentage terms. The magnitude of the earnings beat has not been particularly high lately, but consistency is remarkably important in this area.

Accelerating Relative Strength

Relative strength tends to be sustained over time. In other words, stocks that are outperforming the market in general and the sector in particular tend to continue doing so over the next few months.

Besides, money has an opportunity cost. When you buy a stock with mediocre returns, that capital is not available for investing in companies with superior potential. This means that you don’t want to just buy stocks that are doing well, you really want to buy stocks that are doing better than others.

Apple is doing better than both the SPDR S&P 500 (SPY) and the PowerShares (QQQ) over the past 12 months.

ChartAAPL data by YCharts

Looking a shorter time-frame, the difference in performance is far more pronounced, and Apple is significantly beating both index-tracking ETFs in the past month.

ChartAAPL data by YCharts

Apple is not only offering vigorous relative strength, it’s also showing an acceleration in its outperformance versus the bread market, and this bodes well in terms of potential returns over the coming months.

Putting It All Together

The PowerFactors system is a quantitative investing system available to members in my research service, “The Data Driven Investor.” This system basically ranks companies in a particular universe according to the factors analyzed in this article for Apple: financial quality, valuation, momentum, and relative strength.

The system has produced solid backtested performance over the long term. The chart below shows how the 50 stocks with the highest PowerFactors ranking in the S&P 500 index performed in comparison to the SPDR S&P 500 ETF since 1999. The backtesting assumes an equal-weighted portfolio, monthly rebalanced, and with an annual expense ratio of 1% to account for trading expenses.

Data from S&P Global via Portfolio123

The system more than doubled the benchmark, with annual returns of 12.92% per year versus an annual return of 6.13% for the market-tracking ETF in the same period. In cumulative terms, the system gained 954% versus 216.61% for the benchmark.

Apple is one of the 50 stocks currently picked by the system, which means the company is among the best 10% of those in the S&P 500 based on a combination of quantitative indicators that measure financial quality, valuation, business momentum, and relative strength.

The stock has particularly high scores in quality and value, which basically means that investors in Apple are buying a strong business for a convenient price. Simplicity is the ultimate sophistication, and the bull case for Apple is quite easy to understand when looking at financial quality and valuation numbers.

Capitalize on the power of data and technology to take the guesswork out of your investment decisions. Statistical research has proven that stocks and ETFs showing certain quantitative attributes tend to outperform the market over the long term. A subscription to The Data Driven Investor provides you access to profitable screeners and live portfolios based on these effective and time-proven return drivers. Forget about opinions and speculation, investing decisions based on cold-hard quantitative data can provide you superior returns with lower risk. Click here to get your free trial now.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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