What’s Wrong with Apple?

Nothing (as strange as that may sound coming from me.)  Of course I’m referring to Apple’s stock price (AAPL) and specifically the precipitous 13% drop just last week, and the 37% drop over the last four months.

   But to more completely answer the question: what’s wrong is the Wall Street analysts and the investors.

To be up front, this story is not unique to Apple, they just happen to be the latest example and not to mention, I enjoy talking about them.

In early 2012 Apple stock started a surge upward.  Having started the year at just over $400 per share, by early April it was over $600.  By mid September it was at $700.  Now, any normal, non-religious trader (meaning not having Apple religion) would look at that price surge and understand it was unsustainable.  In fact that’s when you’d look at going short, i.e., betting on a downturn in price.  But in August there were no Wall Street analysts saying take your profits and get out. In fact many were saying the sky’s the limit.  One analyst had their target an unfathomable price of $1,111 per share!  Where did these people learn their trade?  Why do they get paid to give that type of advice?

Apple stock priceTake a look at the chart on the left showing the last four years of Apple stock prices.  In addition to daily closing prices the chart also has a channel that captures the trading range of AAPL over that time period up to the 2012 surge.  The channel shows that while the stock price was increasing it traded within a range of about $80 throughout that period.  If one had been looking at this chart in early 2012, a reasonable prediction of pricing for September would have been $440 to $520.  So when the price was at $700 instead and nothing substantial had changed with the company you’d have to be thinking about a pending correction… right?

Not Wall Street.  They thought Apple could continue to defy market gravity and keep on going up.  Why were analysts not saying it was overpriced?  I can come up with four plausible reasons:
1 – They (or their company) owned Apple stock and were trying to pump it up.
2 – They have Apple religion and give faith-based advice.
3 – They are incompetent.
4 – Using a term from Alan Greenspan, former Fed Chairman: “Irrational Exuberance” by investors.

Personally I think it is a combination of #2 and #3 with respect to the Wall Street analysts and #4 for the people listening to them.  And as we all know now the inevitable did happen; the stock came back down to around it’s normal range.  The most unbelievable part of this story is that through mid January, even though the stock had dropped a quarter of its value, hitting $514 on January 23rd, Wall Street analysts were still bullish!  It wasn’t until the following week when the stock plunged down to as low at $440 that these zealots started to downgrade their recommendations.  Even more unbelievable is the way no one seems to be held accountable.  Nice work if you can get it.

Apple is certainly a better investment today than it was before the correction.  From the chart one could make the case that it is actually a little underpriced and should be in the $480 to $560 range.  Then again, it is also possible that the overall direction of the stock will go down, meaning a new channel would be drawn headed in the downward direction (such as RIMM).  But even I wouldn’t predict that for Apple… yet.

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