When the market falls, Apple shares usually fall further. Investors should brace for the worst if the broader market continues its decline.
By Andy M. Zaky
For as long as I can remember, Apple (AAPL) has been a slave to the direction of the broader market despite its unusually strong fundamentals. Whenever the broader market sells off, Apple's drop is more severe. When the market rallies, investors tend to focus on Apple's excellent fundamentals, and the price action becomes more representative of what the stock should be worth.
For example, in August 2007, while the DJIA underwent a 10.7% correction, Apple saw its stock price get utterly slaughtered, falling 33% -- triple the market's move. And this came at a time when the iPhone craze had just hit and Macintosh computers were flying off the shelf in droves. There was no clear fundamental basis to warrant such a big move down.
That October, it happened again. In a 4-day period, the Dow dropped 8% while Apple shares plunged 21.9%. In January 2008, when the bear market first started to pick up steam, the DJIA experienced a 13.5% correction in a two and a half-month period, while Apple's share price was nearly cut in half, from $203 to $115. Again, this came at a time when Apple's fundamentals were arguably stronger than nearly every other stock in the U.S. equity markets.
Throughout the financial crisis, Apple posted one record quarter after another, posting huge increases in revenue and earnings. In fact, there was a lot of evidence suggesting that Apple was the most undervalued of the large cap tech stocks and by quite a large margin. To get an idea of just how irrational the market got with Apple during the financial crisis, the Financial Select Spiders (XLF) fell 70% in the same period of time when Apple dropped 60%. The market treated Apple as if it were a financial stock despite its massive cash horde and zero debt.
On Tuesday, shares of Apple plunged 4.5% while the DJIA shed 2.7%. Will history repeat itself or have Apple's strong fundamentals become so widely known as to make it more immune to the whims of the broader market? This question couldn't come at a better time as discussion over this gigantic 8-month head & shoulders move in the stock market makes its way through the financial world.
Several technical analysts believe the market is getting ready to make a very big move down in the markets, and that there's a growing possibility that a double-dip recession might even take us down to retest the bear market lows -â?? though I don't think this is a strong possibility at the moment. Yet, evidence suggests there's a strong case to be made for a move to 950 on the S&P and 8800 on the Dow. If we get this sort of dramatic drop, what should Apple investors expect?
One can argue that a big move down in Apple's stock price might be in the cards over the next few weeks. At the same time, however, Apple has held up quite well in the face of this Mayâ??June 2010 correction. While the market has plunged almost 13%, Apple even made new all-time highs of $279 right in the middle of this correction.
In the past, a 12-13% sell-off in the markets usually amounted to a collapse in Apple's stock price. But that didn't happen this time, despite the fact that a sell-off is well overdue since the stock has catapulted straight up from a bear market low of $78 to $279 without any meaningful pullbacks.
That being said, when Apple outsells the broader market, it tends to be a bad sign for the market overall and for Apple investors in particular. Apple has been the market leader in this recovery, and once the market starts to lose faith in its leaders, that's when things really unravel. So while some evidence suggests that the 2010 Apple is a new and more resilient Apple than the Apple of the past, recent weakness in the stock appears as if it is ready to resume its old ways.
Andy Zaky is a graduate from the UCLA School of Law, and editor of Bullish Cross. His main area of emphasis is in global macro-economics, fundamental analysis and technical analysis. Andy also regularly follows and conducts financial statement analysis and quarterly earnings projections for Apple, Inc. and other high profile tech stocks.
Aapl's pe in all those instances were much higher , 50s in 07 and 40s in 08, it's now 21 which will be even cheaper after this earnings in 2 weeks . Apple's cash position has hugely improved the last 2 years , it's just announced 2 major products and the fundementals have never looked this good . In past market drops of the past 2 years the global banking system was on the verge of a breakdown, there was no hope for any consumers buying any products ( which Apple proved them wrong) . This is not a depression again , the economy is in no shape where it was back then, the companies earnings are much stronger and with the upcoming earnings report starting with Intc we will see a huge rebound in the market and new highs in Apple. Lastly , the accounting change that was implemented this year now truly shower Apple's correct earnings power whereas in the past nobody understood or cared ! I know u fully got it then Andy but even you gave up mid year cause u were tired of market not rewarding Apple's fundamentals, it's a different world now! I have been a big bull since 06 and always had a price target of 350-450 on the stock when analyst were calling for 100-150, this is the FIRST time the analyst are getting close to my targets ! The street is finally realizing Apple's power!!!
Is this article an analysis or just a report on historical facts about Apple's stock prices? If it is an analysis, what's the conclusion? Flip a coin and then buy or sell accordingly? Check the company's fundamentals and then follow your gut's instinct anyway? Or do whatever and be at the mercy of shorting day-traders, fund managers, big investment houses and pseudo analysts/bloggers?
From this article we could gather that dealing with Apple's stock prices is a very complicated issue not unlike human psychology; fairly unpredictable. Totally irrational... Pure speculation... Everywhere!
I believe that Apple's unwarranted stock price downdrafts are the result of FUD, fraudsters and bloggers spreading it virally, i.e stock manipulation and the fact that the uptick rule no longer is in effect. When will the SEC take notice and punish some of the violators?
Dammit all to hell. I thought a lot of those Apple share price drops in the past couple of years were mainly due to Steve Jobs illness and lack of succession strategy. How can a company with such fundamental strength be manipulated so easily. But why the irrational pessimism since consumers continue to buy Apple products despite the sagging economy. Money continues to pour into Apple thanks to TWO super-hot products and yet the share price continues to drop.
I swear it makes no sense at all to me so I guess that's why it's irrational. I'm glad I'm long Apple, but every time it looks like Apple shares will catch some smooth sailing, they run into a reef. It appears another hot quarter will go into the toilet for investors while Apple's cash reserve goes up another few billion dollars.
With AAPL's now well-established reputation for volatility, plus its consistently strong fundamentals, wouldn't the institutional money (that 70% of Apple ownership which can dip in and out easily and in large amounts) find the stock ideal for pump, dump, and buy again? "Hey, this one's ripe for dating!" Thus, sustained price gyrations.
But look out. With prospects for the next few years becoming more and more attractive, one might just want to hold on.
I regret we don't have more like John Bogle (founder of the Vanguard funds) around:
"Our old ownership society, in which stocks were owned largely by individuals is long gone and will not return. Its successor, the agency society, now prevails, institutional money managers holding and trading the lion's share of U.S. stocks and operating in their own financial interests."
Too bad. I wonder if some day "survival of the fittest" will require relinquishing one's "me, me, me" habit.
Great article and analysis
Great prespective on the current trends. I agree that this represents irrational pessimism. Look forward to see how apple responds in the coming days.
The latest JP Morgan price target for Apple is within a whisker of $400/share (!), and the stock is trading around $250/share as I type. There's such a thing as irrationality in the market, and this is a classic case. Now, if the P/E ratio was in line with its historical P/E ratio (~50 over the last decade), then maybe one could see reason in this. But when the P/E ratio is less than 22 without backing out Apple's huge reserve of cash, then one can only say that this is a case of "irrational pessimism".
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