what’s wrong with AAPL?

AAPL shares have been steadily underperforming the S&P 500 since late September, losing 30% of their value relative to the index over this span.

I think several factors are involved:

1.  potential income tax law changes.

In the recent debate over increasing tax rates, suggestions were circulating that the tax preference on long-term capital gains vs. ordinary income should be eliminated.  That would have raised the Federal tax on long-term gains from 15% to over 40%.  The worry that this would happen was the trigger for taxable AAPL holders with large profits (meaning just about everyone) to realize at least part of their gains in 2012.

I think this was a big reason for downward pressure on AAPL shares during 4Q12.  However, the relative weakness has continued pretty consistently so far in 2013, other than during the first couple of hours of trading in the new year.  So it can’t be the whole reason.

2. a slowdown in iPhone 5 sales?

 Component suppliers to AAPL have been saying for a month or so that the company is deferring orders for iPhone 5 parts.  The latest such announcement comes in the Nikkei newspapers in Japan, usually an extremely reliable source.  AAPL orders to Japanese makers of  iPhone 5 screens for 1Q13 have supposedly been halved to 33 million (I read about it online and in the WSJ and FT).

In itself, this is not such a big deal, in my view.  It’s not clear whether AAPL has excess inventories or whether it’s shifting business to alternate suppliers in, say, Taiwan or mainland China.  And it’s also possible that any slowdown will only last a quarter or two.  I don’t know, but it’s possible.

3.  Who are the new buyers?    

This is one of those odd stock market phenomena.

Individuals and hedge funds caught on to the AAPL  story before many mutual funds.  But the damage to relative performance from not owning AAPL, or from having less than the market weighting became so severe that virtually every mainstream professional has already been forced to build a huge position in the stock.

So who’s left to buy?  Almost no one, in my view.

In fact, early supporters, who have enjoyed outperformance for most of a decade from holding a lot of AAPL must be thinking that the way to distinguish themselves from rivals today is to be underweight the stock.  This can happen in two ways–either by selling shares of AAPL or by just not buying any more as new money comes in.

Maybe this sounds a little crazy to you, but I think this is the main issue the stock is struggling with today.

4.  Is the AAPL growth story “broken”?  

Typically as a growth stock continues to report surprisingly strong earnings, its stock price moves sharply higher.

Two reasons:

–the market adjusts to the higher level of profits and

–the price earnings multiple expands, as investors raise their expectations for future growth.

As earnings begin to disappoint, as they sooner or later must, this process goes into reverse.  The stock price adjusts to lower current earnings and the price earnings multiple, usually sky-high by this time, begins to contract.  Multiple contraction is, in my view, the worse of the two.

AAPL’s case is unusual, however (in fact, it’s the only stock I’ve seen exhibit this behavior).

The company’s earnings are 10x what they were five years ago.  During the entire earnings expansion, however, AAPL’s PE has been contracting.  Yes, an accounting change may have caused part of this.  Still, the stock traded at 30x earnings in 2008 and trades at 12x now!  In other words, a slowdown in growth has been baked into this Wall Street cake for a long time.

I don’t think there’s any expectation in today’s stock price that AAPL will ever produce another spectacular product like the iPod or the iPhone.  As I read it, the current quote expresses doubt that AAPL will be able to defend its market position against competitors like Samsung.  That seems a little harsh to me   ..but I haven’t done careful research to convince myself that this is the case.





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