Institutional Selling Demonstrates Depth of $AAPL Ignorance

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Some SEC documents filed on Thursday suggest that hedge fund selling contributed—perhaps greatly—to the precipitous decline of $AAPL throughout the December quarter, and by extension the early part of 2013. That's not too surprising, but what's more interesting to me is that it's a demonstration of an idea that's been kicking around in my head for a while.

That idea is this: Most people don't get Apple. At all.

That's the short version. The slightly longer version is that there was just as much ignorance about Apple, it's business model, and the value proposition of Apple's ecosystem when the stock was skyrocketing as there has been in this 30 percent downturn.

Let's look at Friday's hedge fund news, which was picked up by Fortune's Philip Elmer-Dewitt. Some 16 institutions and hedge funds sold off a million shares or more. The chart below shows that many of these institutions reduced their relative stake in Apple significantly.

Institution Chart

Chart by The Mac Observer

That adds up to a lot of selling pressure in the middle of Apple's most profitable quarter ever. Millions of shares were added to the market, and even though the buyers were there to pick up these shares, economics 101 says that more selling pressure equals a lower price.

FUD

Something happened after $AAPL hit an all-time closing high of $702.10 on September 19th. Investor sentiment took a 180 degree turn, and from my viewpoint, there was a lot of FUD driving some of that sentiment.

PullquoteThere were reports of component orders and fears about declining demand for Apple's products had little or nothing to back them. There was also a lot of noise about Apple Maps and the poor rollout of that service, even though it turned out that people still bought iPhones as fast as Apple could make them.

My personal favorite was this fixation in some quarters that Apple had lost its innovation mojo because Tim Cook hadn't released a disruptive product after 14 months at the helm of Apple. I mean, seriously, that's just stupid and anyone saying that is merely showing their inability to research Apple's product timeline or exercise critical thinking skills.

More recently, we've gotten this new wave of pundits and critics who are prancing about yelling that for Apple to be successful, it must start doing what everyone else does. Cheap iPads, cheap iPhones, a broad product line...even open licensing has made a bit of a comeback.

Those of us who have followed Apple for a long time have witnessed this sort of thing forever. As Apple's stock rose, and rose, and then rose some more, it might have seemed like those days were gone, but—and here's my point—this same sort of ignorance about Apple has been prevalent all along.

Some Wall Street analysts were saying questionable things about Apple while the stock was climbing. In some cases, those stupid things took the form of "Buy" ratings, but it's a lot easier to ignore people who are right for the wrong reasons than it is when they're wrong for the wrong reasons.

The same is true for $AAPL investors. A lot of people bought shares of $AAPL on the way up not because they had a clue what Apple does or how it does it, but rather because everyone else was. This was true both at the retail level and the institutional level.

Indeed, at the institutional level, the pressure was even more intense. If you were a fund manager without $AAPL, you were nuts. $AAPL was such a powerhouse for so long—and remember that Apple Inc. is still the world's most valuable corporation—that owning shares was practically synonymous with window dressing.

That's kind of entertaining, too. Back in the early part of the last decade, some funds bought $AAPL during the quarter, but would then sell it off when it came time to report so that no one would see them owning the stock. This was the reverse of what may have happened in Q4 of 2012.

Lots of Factors

To be sure, there were many things that contributed to $AAPL's recent sell-off. Profit-taking, for instance was surely a part of it. There was a lot of money to be taken off the table, especially when $AAPL was flying high at $700 a share. Apple also missed Mac estimates, and it barely met iPhone estimates.

I also don't mean to imply that Apple is perfect and that the company should be trading at a gagillion dollars per share. There is a vast difference, however, between believing that Apple screwed up the Apple Maps rollout and selling the stock because Apple is on the skids as evidenced by Apple Maps.

As I Was Saying...

Back to the hedge funds and other institutions, the reason why they have so many shares of $AAPL to sell in the first place is because they loaded up on them on the way up. It's my opinion that there was a lot of bandwagon jumping in both directions. Ignorance fueled the rise just like it fueled the sell-off.

Most people don't get Apple. Wall Street is still largely steeped in the Microsoft era of open licensing and a focus on specs and rush-to-the-bottom pricing. Not understanding how and why Apple makes its profits, and why that model is sustainable, will absolutely have an effect on how you invest (or don't invest) in the company.

Apple raking in money hand over fist has had only a marginal effect in changing this. There are a handful of analysts who completely get it, understand it, and are tapped into Apple's supply chain in a way that gives them real insight on what to expect. There are another dozen or so—maybe a score—with a fairly good grasp of what's going on.

The rest are a bunch of bandwagon jumpers and leapers flailing about in ignorance, and there are some 54 analysts covering Apple right now. Think about that for a moment.

In the end, Apple is still the world's most valuable company, but the trajectory of the company's stock shows that the more things change, the more they stay the same.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.

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Comments

Imagestealer

Just goes to prove that most heavy duty investors are in it only for the money.  they have no concept of what really drives the wealth, but are experts at gaming the system to their own advantage.

Caveat Emptor!

Paul Goodwin

I agree Bryan. I was flabbergasted when it was on the way up, not able to understand the reasons. I’m equally flabbergasted that the stock is floundering now. IMHO it’s about $100 low.  Their P/E is solid.

Paul Goodwin

And there’s no evidence that their game plan isn’t solid either.

Bosco (Brad Hutchings)

The delay of iMac availability is directly attributable to supply chain issues caused by Apple moving away from Samsung. Are those lost sales? Perhaps mostly deferred, but it highlights a huge issue about Apple’s cash. The cash can’t make up for the problems created by suing Samsung. And so you’ve got a company with a 12 figure cash balance that’s basically impotent. This is why investors are demanding preferred shares, higher dividends, etc. Because giving the money back seems to be a better investment than doing anything with it.

As Larry Page recently said about Jobs’ thermonuclear war on Android, “How’s that working out?” The answer is terribly. It hasn’t stopped competitors from taking market share, it’s shattered Apple’s best supply chain relationship, and it’s shown investors that Apple lacks imagination about what to do with its cash. It will go down as the single stupidest business strategy ever deployed, and may only be excused because a certifiably crazy man was dying of cancer.

I'm not a CEO

Gosh!  There seem to be a lot of very frustrated folks who believe they are more capable of being CEO’s rather than journalists who love to write fiction to get published.  Folks, why don’t you apply for the CEO positions that open in industry rather than pretend to be authoritative in areas you are not.

Paul Goodwin

Bosco. Apple impotent? They’re shipping more hardware than ever. Market share isn’t a meaningful measuring stick. Net income is, and they’re doing better than anyone. And as for the cash, the interest on their cash is likely $11 billion per year. That alone is probably is more than they need to fund R&D,

Paul Goodwin

And pay for the lawyers too.

David Winograd

Brian,
Your article doesn’t talk about tax selling. That, to me, is the number one reason for dumping Apple in 2012. It’s also the main reason for buying it back, which is why I think AAPL will have a good year.

Bosco (Brad Hutchings)

Whoah Paul. From Apple’s 10-K filed 31-Oct-2012 for FY2012 ending 29-Sep-2012, their interest and dividend income was $1.088B.

The problem here is how much cash is needed to generate those record revenues. What investors are saying is that even though the level of revenues is impressive out of context, when you add in the context of cash tied up, there are better ways to allocate capital. Any analysis that ignores this has a pretty big hole in it. With great cash on hand comes expectations to actually use it to improve business.

Bosco (Brad Hutchings)

Larry Page v. Tim Cook… In Cookie’s media appearance, he’s vaguely promising that there is some innovation left in Apple and telling investors how he’s going to increase production costs on iMacs so they can be made in America again. Page, in his Wired interview, is talking about building a company that can scale to 1,000,000 innovators of the quality he has working for him now.

Bryan Chaffin

An excellent point, David.

Mark Lucas

I really enjoyed the article.  I come at it from a slightly different perspective - looking at technology trends.  They have logically and methodically built a well thought out software and hardware infrastructure and leveraged that across the product line.  Tim Cook is probably a better CEO than Steve Jobs - though not as good of a salesman.  Johnny Ive and the philosophy that Steve built will lead to the next round of amazing products that build on what they already have.  From a technical perspective, most of the time I see little sound logic in the financial world (related well in this article).  I’ve invested for the long haul on what I understand best - that has worked out well for me (first purchases at $23/share).  Maybe I’ll try a day trader strategy where I go opposite the financial pundits on AAPL.  Again, great article.

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