News Analysis date published New: 
Friday, April 27, 2012 - 10:00
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Friday, April 27, 2012 - 10:33
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Friday, April 27, 2012 - 10:00

If you Own Shares of Apple, Then You'll Want to Read This

Friday, April 27, 2012 - 10:00am

In the mid 1980s, my favorite band was R.E.M. At that time, they were the kings of college radio and snotty rock critics. But high school kids were still using Van Halen, Loverboy and Journey as their soundtrack for getting in trouble. When classmates would kid me about listening to the weird, minimalist music that they didn't play on commercial radio, however, I would simply reply, "Yeah. Just watch. There'll be an R.E.M. tape in your collection by the time you come home for Thanksgiving break of your freshman year of college."

I was at a party during Thanksgiving break of my freshman year of college. One of detractors came up and thumped me in the sternum. "You were right about R.E.M.!"

The herd had caught on.

R.E.M. went on to a major label, multimillion-dollar deal and became mainstream. I still liked R.E. M., but it had grown beyond being an outlier band from Athens, Georgia. Their output changed, perhaps dictated by a much bigger audience.

It's similar to what's currently happening to Apple's (Nasdaq: AAPL) stock price. It's no longer moving based on fundamentals.

The herd is in control.

When this happens, numbers get ahead of themselves. The good money has been made. Now, we're entering the phase when money can, and probably will, be lost.

The inmates are running the asylum...

If I had the time to count how many times the movement of Apple's stock price was analyzed ad nauseam by talking heads and guest pundits in one day on CNBC, then I'm sure I could fill up at least one yellow legal pad with tally marks. Is this because Apple's price movement is vitally important to the overall health and well being of financial markets? No. TV programming is steered by what viewers want to see. And everyone's interested in everything Apple. Therefore, the talk will be everything Apple.

No one has to convince me that Apple is an amazing company. It is. Its products are cutting-edge. But the stock can only run so far.
Here are three reasons why it may be time to take some of your money off the table, if you own shares.

1. Expectations are too optimistic -- In an April 17 research report, Credit Suisse analysts reiterated their "outperform" rating with a 12-month price target of $750. They also expect iPad sales to grow by 66% to 66 million units, compared with last year's 40 million units. Credit Suisse also expects 2012 revenue to grow 57% to $170 billion from last year, and by 25% to $213 billion for 2013.

These are huge numbers and frankly, they just don't seem realistic. That's a 48.6% compound annual growth rate for a two-year period, which basically assumes the same annual revenue growth rate the company has enjoyed since 2008. To assume this could continue and to throw money at the stock is a fool's errand, given the likely future economic weakness in Europe and China.

There are already a few tiny cracks showing that most devotees refuse to acknowledge. For example, iPhone activations at AT&T (NYSE: T) were down 43% in the first quarter of 2012 to 4.3 million units, compared with 7.6 million units for fourth-quarter 2011. That's significant, seeing as how iPhones represent 60% of all smartphone sales for AT&T. A 43% drop is a big number from Apple's biggest customer. It's also a caution flag.

2. Momentum taking over -- According to New York University finance professor, Aswath Damodaran, Apple has become a momentum stock. Momentum investing relies on the acceleration on a stock's price (in either direction). This strategy relies more on short-term price fluctuations rather than fundamentals.

"The new investors of Apple scare me. They're momentum investors," Damodaran told Bloomberg TV. "Once stocks become a momentum play, intrinsic value goes out the window." Damodaran is a renowned scholar of intrinsic valuation. He's also done quite well with Apple. He started buying shares in 1997, when they had cratered to about $5. He's selling now. I consider him the smart money.

3. Institutional influence -- Institutional investors own about 71% of all outstanding Apple shares. This includes mutual funds, pension funds, endowments, hedge funds, etc. Many institutional managers are no different from individual investors in their tendency to get caught up in herd mentality. Manager A owns Apple? Well... we'd better have it too! What? Manager X is shorting it? We need to get on that right away!

I have become very skeptical when a mutual-fund salesman shows me a large-cap equity fund that supposedly outperformed last year. I immediately look at the top five holdings. If Apple is in the top three, you can more or less guarantee that if you strip out Apple's contribution, the results were mediocre to bad.

Risks to Consider: I'm not ashamed to admit that I am bearish on Apple (see the article I wrote in June of last year). At the same time, I was dead wrong. Shares nearly doubled since that article was published.

Apple is a classic outlier company even without Steve Jobs. It could very easily reinvent the wheel and the herd could take the price even further into the stratosphere. The company has been awfully quiet since the launch of its cloud-based storage product. That could be good or bad. Nevertheless, the chart looks broken to me.

Action to Take --> Apple shares are currently down around 5.5% from their recent high of $644. First-quarter earnings were a blow out. That's great, especially if you already own shares. But going forward, that only makes outperformance that much more difficult for the company. Any slight disappointment and a huge pack of lemmings will likely head for the cliff.

If your gains in the stock are substantial, then take some, if not all. If you're so attached to the stock, which typically happens to investors who have a great deal of success with one particular investment, then take out your original investment and play with the house's money. Also, you can place trailing stop-loss orders of 10% below the current price, for example. If you don't get stopped out and the price recovers, bump up your price. It's better to be safe than sorry.

Adam Fischbaum does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of T in one or more of its “real money” portfolios.