Why hedge funds are dumping Apple

Sellers seem to think they can take profits now and then get back into Apple on weakness when less sophisticated investors decide to bail.

By Jim J. Jubak May 18, 2012 2:55PM
Sellers of Apple (APPL) Thursday -- and really since the stock's intraday high of $644 on April 10 -- look like they're trying to get out in front of an expected slowdown in iPhone sales in the June quarter.

The thinking is that consumers will hold back on purchases of existing iPhones because Apple is expected to release a new model in October. Rumors and industry intelligence say that the new iPhone will be the physical redesign that the 4S, introduced in 2011, wasn't. The big changes are predicted to include an upgrade to a 4-inch screen from the current 3.5-inch
screen and the ability to use the faster 4G networks being expanded by AT&T (T) and Verizon (VZ) and other cell phone companies.

The Wall Street Journal has reported that production for the new 4-inch screens for the iPhone
could begin as early as June at LG Display, Sharp, and Japan Display. Combining Apple's Retina display technology, now on the iPhone 4S, with a bigger screen will be Apple's attempt to leapfrog the larger screens that have been available on some Android phones.

It's no surprise that the introduction of a new iPhone model can slow sales of existing models. In the company's fiscal fourth quarter in 2011 -- the company’s fiscal year ends in September -- sales dropped as customers waited for the iPhone 4S. And in April Apple told investors to expect a decline in sales for the current fiscal third quarter.

Sellers, and much of the selling has come from hedge funds, seem to be thinking that they can take profits now and then get back into Apple on weakness when less sophisticated investors decide to sell on that predicted drop in iPhone sales. According to Bloomberg, hedge funds accounted for a third of Apple shares sold in the first quarter. Since hedge funds still held 38 million Apple shares as of March 31, it's a good bet that they've been a major contributor to sales of Apple shares in April and May.

Might work. Although it seems an awfully complicated strategy based on a perhaps outdated notion that individual investors still move stocks. And on a projection that the macro-trends driving the current general market downturn will remain in place.

Me, I just like Apple's fundamental value at the May 17 close of $530. There is downside risk -- there's downside risk everywhere you look in this market -- but I think Apple's decision to start paying a dividend of $2.65 in the quarter that begins on July 1 does mitigate a bit of that risk. Not so much because the 2% yield is going to be so attractive, but because paying a dividend will expand the pool of institutional investors who can buy Apple. (A significant number of institutional investors are limited to buying stocks that pay dividends.)

I still think Apple faces significant technical barriers at $650 a share, but with the recent sell off that level is now 22% above the $533 price at noon on May 18. I'm adding Apple to my Jubak's Picks portfolio with a target price of $650 a share by December 2012.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. post. The fund did own shares of Apple as of the end of December. For For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.
May 18, 2012 5:01PM

"Sellers seem to think they can take profits now and then get back into Apple on weakness when less sophisticated investors decide to bail."

Otherwise known as pumping and dumping mom and pop and the muppets. And, when High Frequency Trading computers do it at the speed of light using over a million false quotes per second, it’s pretty much over before the retail investor even knows it happened. Just the place for your retirement funds this stock market is, don’t you think?


May 19, 2012 5:08PM
I remember reading an article on this site 2-3 months ago suggesting Apple was headed for $1650/share. Not going to happen.

I'm not hating on Apple. It's just that they make a lot of money because they have ridiculously high margins. If they keep high margins, their market share will stall and not grow much (if at all) moving forward. 

If they lower their prices to compete (eventually this is inevitable), then their profitability plummets.

You can't charge twice what your competitors do in the long run for essentially the same product.
May 19, 2012 10:58AM
When several analysts predicted over $1000 per share, you knew the party was over.  I'm still long Apple, but I've been using covered calls to hedge my position.  The strategy looked pretty dumb until the past couple of weeks. By all reasonable valuation methods, Apple is dirt cheap at it's current price, but that doesn't mean it can't or won't go lower.
May 21, 2012 9:58AM

The people that run Apple are smarter than the Hedge Fund Clowns. Stay the course!

The Old Salt

May 21, 2012 5:43AM

Apple will definitely hit $1000.


The vast majority of people still don't own an iphone.  Most of them probably want one, it's clearly the best phone available overall.  I'm one of them btw, I've held off from buying one due to price, but I think I will take the plunge with the 5.  I'm also considering an ipad.


Their PE is 10 or 12 depending on how you count.

Their PEG is an insane 0.2.

Basically, Apple is priced as if they have zero growth left, even as they are still growing like mad.

May 21, 2012 8:19AM
johneco, iPhones are NOT popular like other phones in Asian markets.  

I don't own an iPhone nor do I want one.
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