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.