The Amazing Resilience of Apple Stock

“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.