The One Thing You Can’t Ignore About Apple

by James Brumley | May 9, 2013 1:18 pm

You can analyze Apple’s (NASDAQ:AAPL[1]) handset market share all you want.

You can mull its guidance for the second calendar quarter until the cows come home too.

In fact, you can get a third-party legal opinion on its serial patent lawsuits, digest the potential impact of its $100 billion stock buyback and debate the pros and cons of the company’s decision to offer lower-priced products.

But none of it will actually help you handicap where the stock’s apt to go next.

A few of you already know where I’m going with this. I’m willing to bet most of you, however, are wondering how I can effectively say “don’t bother worrying about any of the usual things that matter.”

I’m not crazy (at least not for this reason). I’m just an observer. But I’m here wtih an observation that could make or save you some money.

A Recap

Apple’s been a decisive winner since early 2009. That’s when the current bull market began, and when the iPhone began its transformation into a cultural icon as well as king of the smartphones. Beginning in early 2012, though, AAPL shares took on a life of their own, rallying 72% over the course of the first nine months of that year.

It was a huge and uncharacteristic shift in momentum, visually as well as numerically. Yet, few seemed to care at the time, since the company was doing well and — hey, a rising stock never stops rising, right? No need to be distracted by pesky details like future prospects, competition or market saturation.

Headlines like Kiplinger’s “Apple Stock is Still Cheap” were the norm all the way through mid-September … right before AAPL began a 40% pullback. [Note to self: A ‘cheap’ stock doesn’t do you any good if it’s in the verge of a 40% meltdown.]

Questions were posed over the course of the pullback. They started slowly at first, but the deeper the knife cut, the more we heard investors query (to no one in particular) how and why AAPL could dole out such a seemingly impossible selloff, and when would it all end.

Eventually — after six months of losses — the market simply accepted defeat. Goldman downgraded Apple to an outright ‘sell’ on April 2. Apple’s Vice President of Operations, Jeff Williams, sold nearly $1 million worth of stock. Just a few days ago Business Insider published a no-minced-words commentary with a headline of “Expect Ugly Guidance,” referring to Apple’s calendar Q2.

It leaves little doubt that the market had finally decided to collectively hate the stock as much as it loved it less than a year earlier. Of course, AAPL has gained nearly 15% since mid-April, when the market finally threw in the towel.

The irony? Apple’s earnings growth rate wasn’t abnormally strong in 2012, nor has it been unusually weak since September when the stock began its meltdown. It was (wait for it … wait for it) perception, hype, greed, fear and assumption that detached the stock from its underlying company, and made the stock itself the story.

There’s nothing inherently wrong with that, but not recognizing that reality has been bad news for a lot of investors’ portfolios.

The Reality

It’s a rarity for a stock to become “bigger than life itself” and create a mania that commands the market rather than responds to investor opinion, but it can happen from time to time.

Enron was one such story, regardless of its ugly, fraud-laden ending. Groupon (NASDAQ:GRPN[2]) was another. Traders couldn’t wait to get their hands on the e-coupon name before the late-2011 IPO, largely fueled by the fact that the media wouldn’t shut up about it.

Since the stock went public, though, it’s doled out little but disappointment. Facebook (NYSE:FB[3]) comes to mind as well, though none of these stocks seem to have garnered and kept … no … consumed investors as much as Apple has since the beginning of 2012.

All of those intense and action-inducing opinions, however — no matter what prompts them — present problems. Opinions are often irrational and can be quick to change.

If you don’t believe it, just go back and look at the recent chart of AAPL. That wild ride doesn’t even come close to mirroring the company’s underlying fundamentals.

The moral of the story is this: If you own Apple or are on the verge of trading it, just know that you’re not betting on corporate results. You’re betting on the market’s mood.

There’s nothing wrong with that, but ignoring the reality could have some unfortunate consequences.

As of this writing, James Brumley did not own a position in any of the aforementioned securities.

  1. AAPL:
  2. GRPN:
  3. FB:

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