The downside of over-priced

Apple making news this morning on lower earnings growth and the weakest sales increase in 14 quarters. The share price that was $700 in September 2012, is today at $454 for a decline of 35% in 3 short months. The below monthly chart in log scale captures the channel Apple has traded in since the tech wreck in 2000. What is notable are the repeated swings from the top of the channel to the bottom as consensus expectations move from classic over-optimism to over-pessimism.

Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

In 2000, Apple moved through a 83% decline from a $37.26 peak down to $6.30.
In 2007, a 61% decline from a $201.17 peak to $78.44.
In 2013? From the $701.86 peak down to a channel low would take the stock back to approx $275 for another 61% decline.

It will be interesting to see what happens this time. The price experience will also undoubtedly impact broader market sentiment, keeping in mind that outsized gains in Apple made it the largest market cap company in the world over the past 5 years as the company came to represent a disproportionately large overweight of the total S&P earnings growth.

In reality the positive “Apple effect” over the past 3 years managed to gloss over weakness in many other sectors and companies that have continued to struggle in the now post-consumer-credit bubble environment. As calculated by Ned Davis Research in 2012, without Apple’s extraordinary (and naturally unsustainable) earnings growth many broader markets look vulnerable as they flirt with prior cycle highs. S&P 500 total earnings growth as an example, drops from 7.8 per cent year over year with Apple in 2012, to just 2.7 per cent without it.

Apple’s latest price plunge comes predictably, just as Hedge funds and trend following asset managers reported Apple as their top holding at the end of 2012. The typical mindless commentary is plentiful in response. Aren’t Apple’s products still visionary? Is is because Steve Jobs is gone? Why has Apple suddenly lost its Mojo? The answer is relatively simple: Apple shares were destined to correct sharply because its shares were heavily over-bought and over-held by a perpetually expectant group of momentum following analysts and managers. This is a human herd who always becomes increasingly optimistic as stock prices rise and increasingly pessimistic as stock prices fall. This is the precise opposite of what investors must do if they hope to retain and carefully grow their capital over time. A fool and their money will always be easily parted. And those with cash, patience and discipline will continue to experience remarkable advantage across full business cycles.

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8 Responses to The downside of over-priced

  1. mommybomm says:

    I still remember that fateful Friday when Apple launched the much touted I-phone 5. I was at the local BMO Harris bank in Hinsdale IL watching CNBC and next to me was an elderly gentleman. I mentioned Apple, and he said he bought it a long time ago and how ‘wonderful it has been to me’. I said that I just sold mine. And shorted it at 703.48. He looked puzzled and said you sold and shorted Apple? Why???

    Because the story is over. Steve Jobs is dead. There is nothing left to invent. It went when Jobs went. Story is over. Sell and avoid.

    We shall see how this story goes, but for now..STAY AWAY from AAPL. POISON.

  2. John C says:

    Thanks for the info. It’s insane when one company can have that much influence on the markets. It looks like Steve Jobs’s reality distortion field works even though he is deceased. It reminds me of the Spring of 2008 when the TSX was climbing higher and higher due to just a few companies.

  3. dave says:

    “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.” – John Templeton

  4. Dirk Burhans says:

    I am still waiting for this so-called cyclical bull market to end and return to the secular bear we’re supposed to be in… we’ve been in an uptrend since 2009, almost 4 years — it’s starting to look mighty secularly bullish.

  5. if you think this looks like the start of a secular bull, you need to educate yourself on the composite of conditions and valuations that have signaled the start of all of the previous secular bull markets. We are no where close to those precedents.

  6. Dirk Burhans says:

    You are probably right that I need to educate myself, but my point was that whatever we are in started in March 2009, not now… despite all the prognostications, stocks seems to be going higher. I too think we need to bleed out the complacency, but so far it’s not happening.

  7. michael says:

    In the past…when I hunted wild things for food I was only interested in firing if I knew I could get a clean shot and an instant kill on an animal. I remember one instance, an open field a clear shot . At the shot the deer bolted into the bush. I tracked it for 1/4 mile or so before I caught up to it. Mortally wounded it lay with a gaping wound forward of the heart. It’s rush of adrenalin kept it moving for a short while against the inevitable.
    Market adrenaline is no different.

  8. dave says:

    Came across this nice chart of where we are in the investing cycle on apple. Looks like we just are a bit passed the euphoric state with long term holders still in denial and holding on

    http://charts.stocktwits.net/production/original_11659445.png?1359044830

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