The Amazing Resilience of Apple Stock

| Analysis

“The sky is falling” said both Henny Penny and Apple stock speculators late Wednesday afternoon just after Steve Jobs’s resignation announcement. Within minutes, in after hours trading, AAPL was seemingly in free-fall, crashing $US19.06 and losing $24 billion in market capitalization in minutes.

“This was it,” thought APPL speculators looking to cash in on the inevitable carnage. 

Everyone knew that Steve Jobs would leave Apple and that it was just a matter of waiting for the when. Easy money could be had in shorting Apple and holding on for the ride, as the stock would inevitably tumble down a hundred points at least. After all, look how far AAPL had risen over the last year. On the same day last August it was only worth $242.67 and even after the $19 loss, it had risen $114.35, more than a third of its value, and at prices between $360 and $400 who could afford to buy AAPL anyway. It’s just too expensive for mere mortals to buy. So, sell! sell! sell! 

The next morning at the 9:30 am start of trading, AAPL opened at $373.47 and closed the day at $376.18, a loss of $2.46 over the previous days close. On Friday the stock closed at $383.58 rising nearly $10.

AAPL Price Chart With The After-Hours Bottom Marked

AAPL Chart for the past five trading days. Steve Jobs’s resignation is circled.

So what happened?

The market has always been unkind to idiots, whom it considers the easiest of marks. The speculators looking for a quick buck by trying to flip APPL were, as speculators always are, in it for the short term. Although they are quick to tell you that they are dependent upon technical analysis for their trading signals, all too often they are motivated by emotion, and emotion is what caused the after hours sell-off.

It may be possible that speculators running one minute charts could have seen a breakdown, but one-minute charts are no way to plan a strategy. They are prone to the whip-saws and other peccadilloes of the market. 

A clearer example of the market’s best two friends—fear and greed—would be hard to find with greed outpacing fear this time out. Our feeling on why the sell-off seemed more dramatic than it otherwise would have, is two-fold. Firstly, it was brief. After-hours trading is limited to the hours of 4pm - 8pm, so any damage had to be within a four hour window.

Secondly, it’s pretty well known that those who come out to play are mostly the little guys and not the institutional investors that own over 70% of Apple stock. Because of that, low volume (since the number of shares traded are far less than the usual 22 million shares trading hands during the day) can cause wild price swings. 

Whether you know it or not, AAPL is amazingly cheap right now. Here’s some food for thought. In late August of 2008—and we took that date because the iPhone will be well in the mix—AAPL was selling for about $173 on earnings of $7.48 per share.

These days a multiple of even 20 is considered high.  Understanding that is the key to understanding that the lower the multiple the more value is to be had in the stock. At Friday’s close of $383.58 the P/E multiple is a mere 15.18 times. This says the stock is cheap. Very cheap.

Apple stock is not performing like a massive ship that takes forever to turn around. The price has been rising like a punk startup with gains nearly 100% a year. In fact, the 52 week range has been from $253.56 to $404.50.

Over the last week, the most common thread on the blogosphere over Apple management has been that even if nothing happened, the product roadmap will keep the company on a great track for at least the next three years. According to Seeking Alpha, in a post titled “Jobs Resignation Will Boost Apple Stock” the investment site argued that, “The foundation of innovation has been laid for Apple’s growth to carry this stock to $1,000 a share over the next two to three years.” 

The only thing even the bleakest pessimists had in their quiver was that Apple stock would tank when Steve Jobs left and they don’t have that one to kick around anymore — especially in light of Steve not really leaving. As  chairman of the board of directors, he’ll still be around.

So don’t be fooled by the short-term action. AAPL is healthy according to The Street, the analysts, and everyone else who weighs in. Of course, anytime things look too good to be true, something inevitably comes out of the wood work to prove it false, but, for the life of us, we can’t think what that might be.

Authors note: On two points Damien was right. I sourced the 2008 earnings from a site that proved incorrect by providing a quarterly figure instead of an annual one. The correct number was 7.48 bringing the E/S multiple to 23.12 times earnings. I was also off on the math of Apples Y/Y gain, but not wildly so. Thanks Damien for keeping me honest.

Comments

Certain things are elementary

listen, its not APPL…its AAPL

DamenS

Your figures are all wrong - there is no way AAPL had a P/E multiple of 143 in late August (or ANY month) in 2008 ... I bought plenty of shares in Apple in 2008 and their P/E during that period was approximately 30.  You seem to be only taking into account 1 quarter of earnings rather than the trailing twelve months (TTM) which is used to calculate Price to Earnings multiples.

For the 12 months prior to 09/2008 Apple’s Basic Earnings Per Share were $5.48 NOT $1.21 as you claim ... this makes a price to earnings multiple of about 32 - nowhere NEAR the 143 you claim !!

DamenS

I would also dispute that it is well known that “those who come out to play are mostly the little guys and not the institutional investors that own over 70% of Apple stock” - in fact, I would argue that it is generally the exact OPPOSITE of what you are saying;  generally individual investors in Apple are pretty much buy and hold investors and that it is the fact that AAPL has such a high institutional ownership which causes the shares to be so volatile (there was high volume driving AAPL down to $80 on Shorts during the financial crises and then high volume buying huge amounts on the way up to cause a massive price swing and profit as an example).  It is the large Hedge Fund and Institutional holders with their automated trading systems and reliance on Technical Trading who are most likely to be nimble and active in trading AAPL, far more so than those individuals who admire the company and see it as a long term play.

DamenS

Sorry, last comment.  Your over reliance on P/E as a guide to value is very dangerous and symptomatic of a beginning investor who has a lack of understanding of how easily this simplistic figure is manipulated by companies in accounting (“Understanding that is the key to understanding that the lower the multiple the more value is to be had in the stock”) - not to mention that you actually managed to get this simple figure wrong in the first instance (143) !!  Overall, I have to say this is a very disappointing article, and one which shows a very lax vetting procedure.  I only hope that anyone new to investing is not lead astray by the numerous erroneous facts and assumptions contained therein !!

DamenS

Oh God - I can’t believe this - I just read further and you said that Apple’s “price has been rising like a punk startup with gains way over 100% a year. In fact, the 52 week range has been from $253.56 to $404.50”. 

Um - simple maths here ... a gain of 100% on $253.56 is 256.56x2=$507.12 ... so how is a $404.50 a gain of “over 100% a year” ??!!

And I just read that you used to “manage an investment firm” and have a Ph.D !!

DamenS

Ok - last thing here.  It is somewhat disingenuous to state “According to Seeking Alpha, in a post titled ?Jobs Resignation Will Boost Apple Stock? the investment site argued that, ?The foundation of innovation has been laid for Apple?s growth to carry this stock to $1,000 a share over the next two to three years.? 

The “Site” doesn’t really argue anything, as Seeking Alpha (whilst it could be termed an “investing site”) is merely a repository for articles written by anyone ... meaning ANYONE who is clever enough to enter their name and email address to join.  Heck, even I could write an article and post it on Seeking Alpha.

Hence it would be more accurate and safer to state as “an unknown individual of unknown and unverified qualifications wrote on a website”, before citing the article - whereas you use the term “an investment site” to surreptitiously lend credence to an article which is of somewhat dubious and unverifiable origin, but which just happens to support your own contention.

You can surely see how, if I wrote an article, and then used supporting quotes from various forum posts I had seen and then was less than entirely forthcoming about the source - saying something like “experts stated that ...” or even worse “a specialist interest website stated that ...” before quoting the opinions of various (unknown to me) forum members, my journalistic integrity may be called into account ?

DamenS

PS - I notice I did make a slight error in my own figures above - it was meant to read $253.56 x 2 = $507.12, NOT $256.56 x 2 = 507.12

Nicu Mihalache

12m trailing EPS were above $5 during the summer of 2008. You must have confused with one quarter earnings.

That said, the P/E was in the range 30-40 and I do believe too that AAPL is undervalued (even at $400)
http://seekingalpha.com/article/281742-apple-undervalued-at-400

Lee Dronick

listen, its not APPL?its AAPL

APPL is Appell Petroleum Group. see http://www.nasdaq.com/symbol/appl

CG

listen, its not APPL?its AAPL

Listen, it’s not “its”...it’s “it’s.”

mhikl

Occasionally I see comments said harshly on TMO, usually only occasionally.

The gist and quality of M. Winograd’s text made this one of the most important articles I’ve read in a while. Numbers not being my forte, I struggle with the concept of P/E multiples and the meaning and purpose behind after market trading. Today I feel more assured my family’s future is safe.

Merci!

DamenS

Mhikl,

If you truly do have the safety of your “family’s future” resting on AAPL shares and you do not understand something as simple as P/E, and are able feel reassured by this article despite admitting to not understanding it or the criticisms which have been made of it - and further, without making any concerted effort to further educate yourself about those matters on which your “family’s future” is predicated, I feel truly sorry for your family.  At the very least you have been incredibly irresponsible and trusted too much in your stock broker.  You should ALWAYS perform due dilligence on any matter of such importance to your family !

RonMacGuy

DamenS,

Mhikl is a self-made millionaire, owning several businesses each with very little debt.  Trust me, his family has nothing to worry about.  He plays around in the stock market for fun, but is definitely not reliant upon it.

DamenS

That’s good - the comment about this article allaying his fears as to his family’s future had me concerned he had placed all his eggs into one basket and didn’t know what he was carrying !

jeanlenoir

I’d like to say that I read it all and I agree with DamenS. We also have to consider when we invest (for the future of our familay or not LOL) that it is not only the conditions of APPLE that make it fluctuates , it’s the market itself. European’s influence, economy, panic selling. For instance I dont think next week will be ALL GREEN from Monday to friday. There will be sureley some RED days and if its like some days we saw all august it means we can get a - 250 for the Dow as soon as monday and then AAPL will go down as the other. So some speculator instead of waiting til Apple is 500$ can take some strategies with options etc. Or they sell while its high to rebuy when it is lower. It was possible to buy Apple friday morning and sell it friday at 4 h with a good gain for instance. Then wait for a red day next week to buy it around 370$ on a red day for instance (It can be monday) Sorry for the bad sentences, english is my second langage but i think you got the point Bye have a nice day to you all

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