Apple: catching falling knives

by SR on January 24, 2013

Rumour has it

On 10 January I wrote a short piece on falling iPhone production, based on comments from an electronic parts industry exec a couple of weeks previously. Although my source was mine alone, I was not saying anything that had not been reported elsewhere. Forbes had run an article before Christmas, which seemed to be a rehash of comments from sellside analysts, whose job it is of course to pick up this kind of thing early.

Apple's share price up to 10 January 2013

So, I and the other sellside analysts did our job, got the news out to the market so that investors could digest it and the share price responded by incorporating the bad news. Falling, in other words. As you can see from the chart above, which shows the stock up to the date of my post earlier this month, the share price came off from nearly $590 in early December 2012 to just over $530 on 10 January 2013 – a chunky 10% decline. End of story. Market does job, nothing to see here, move along folks.

Fool if you think it’s over

Yesterday Apple released results for the December quarter that were taken as disappointing and gave guidance for the current (March) quarter that was below analysts’ consensus. According the Bloomberg article linked, iPhone sales for the previous quarter reached 47.8m units, in line with analyst forecasts. I suspect that some people were hoping for more and that the stock is being sold off partly because these ‘whisper numbers’ weren’t achieved.

Anyway, in after-hours trading the stock was apparently down to $460, implying a chart that looks like the one below. Since my previous post the stock is down another 13%.

Apple's share price up to 23 January 2013 including after-hours trading

This chain of events reminds me of two important points.

  • It’s hard to tell what’s in the price. Bad news takes a while to work its way into the share price. Different market participants hear the news at different times and react in different ways. Many a time I’ve seen a stock react to bad news and snorted in bemusement: “What, people didn’t know about this?” Maybe they did, but they chose to disbelieve or failed to act in time. In this particular case most institutional investors would have got wind of this before Christmas and even readers of Forbes should have known what was going on. Sometimes it takes an official announcement to hammer the point home.
  • The cessation of bad news isn’t enough – stocks need reasons to move up. Maybe today is the bottom for Apple’s stock and the bad news really is all in the price. Maybe the downside is limited. But what drives the upside? Investors, particularly those who have recently been bitten by a falling stock, need good reasons to buy an issue. Maybe the vaunted “investor with the 3-year horizon” can take the view that Apple’s share price will be higher in early 2016 but in my experience there aren’t many of those investors left. Even pension fund managers are worried about the short-term volatility and these days they pay attention to the share price on a quarter-by-quarter basis or even a month-by-month basis. Just like you and me, they want to keep their jobs. With the iPhone 5 and the mini-iPad already launched and Android powering ahead in terms of units, it’s tough to see much incremental good news in the short term for Apple.

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