Is This the Only Thing Holding Apple Back?

Apple (NASDAQ: AAPL  ) shares have fallen out of favor in recent months. The stock is trading 23% below its all-time high set just three months ago.

There are plenty of reasons attributed to the stock's tumble.

Several analysts have issued cautious notes, blaming contracting margins, market share concerns, and even fashion fatigue.

Well, what if it's something simpler than that?

"I believe in an $AAPL investment thesis that says capital gain tax selling has brought it down, not eps shortfalls or lack of momentum," CNBC's Jim Cramer tweeted this morning.

It's an interesting notion, so let's delve a little deeper.

I've been talking about the looming threat of tax-gain selling in December -- instead of the historical tax-loss selling -- since March. Investors typically sell their losers in December, harvesting losses that can be used to offset capital gains. It's why beaten down stocks usually aren't safe to buy until January.

This year is different.

Coping in a world where conventional tax strategies are upside down
Because of the strong likelihood of the tax rate on capital gains moving sharply higher in 2013, investors may be encouraged to dump their winners instead. Stocks where investors are showing heavy paper losses may make more sense to dump in January. It's usually the other way around.

If you don't buy that, ask yourself why Nokia (NYSE: NOK  ) has popped 133% since bottoming out in July. Research In Motion (NASDAQ: BBRY  ) has also more than doubled since bottoming out in September.

What exactly has happened at RIM to double the stock in three months while Apple has retreated? It's not as if it's been gaining market share at Apple's expense. Yes, RIM did finally establish a date for its BlackBerry 10 launch event, but that comes with no guarantees.

Nokia's pop is even more puzzling. Sure, one particular model from the Lumia line powered by Microsoft's (NASDAQ: MSFT  ) Windows Phone is selling briskly, but that isn't reason enough for it and Apple to be passing ships.

If we buy into the tax-gain selling in December and tax-loss selling in January theories, hard-luck investors that bought RIM and Nokia at much higher prices are merely waiting until January to dump their positions because their tax-nibbling advantages will be greater in a world of higher tax rates.

And, yes, Nokia and RIM are still far away from their highs despite the recent rallies.

Nokia may have more than doubled since the summertime low, but it's still trading 14% lower on the year and 57% lower since the start of last year. RIM is also trading with a double-digit percentage decline so far this year, and it's off a brutal 78% since the start of last year.

Investors with losses don't want to sell just yet, and new investors find themselves having to pay up if they want in.

The same thing could be happening at Apple.

Under the hood at Apple
It may surprise some to learn that Apple is creaming the market this year -- again.

Even with the past few months of softness, Apple shares have climbed 33% this year. Investors sitting on fat gains -- unless they're diehard long-term investors committed to holding on to Apple for several more years -- may want to sell their stocks now while the long-term capital gain tax rates are low.

They can always re-establish their positions by buying back later.

However, that final point is where the thesis begins to fall apart. If folks have been selling since September on that premise, why aren't they buying back now? The stock is even cheaper!

In other words, it's not just the tax-gain selling that's holding Apple down. There is merit to many of the knocks.

  • Google's (NASDAQ: GOOGL  ) Android has been gaining global market share at Apple's expense. The iPhone 5 debut should give Apple a bump this quarter, but then it will likely go back to the same pattern where Android corners the market until the next Apple update.
  • Smartphones remain a two-horse race, but Microsoft's presence via global juggernaut Nokia and the possible revival of RIM's BlackBerry early next year will likely have a bigger impact on Apple at the premium end than Android in the mainstream.
  • Performance still matters, and Apple has come up short on the bottom line in three of the past five quarters.
  • A more competitive marketplace in 2013 will mean that Apple has to either forgo market share by not discounting or taking a hit on margins if it goes for more competitive pricing.

The tax-gain selling thesis is intriguing, and it may be part of the reason for the recent weakness, but let's not assume that it will all reverse itself in January. Apple does have quite a bit to prove in the coming months, and that's what is ultimately taxing.

Get smart
There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 12, 2012, at 5:30 PM, Rxlaw95 wrote:

    Good article but ignores the wash sales tax issue. We are only just now 30 days past the election. So if you sold closer to election time you couldn't buy back without Uncle Sam penalizing you until about now. Plus, if you are looking at the up to $600 down to $500 zig zag, is there really any rush?

  • Report this Comment On December 12, 2012, at 5:59 PM, TMFBreakerRick wrote:

    Rxlaw, thanks for the feedback. However, the wash sale rules apply only to losses -- not gains.

    http://www.jklasser.com/articles/wash-sale-rule/

  • Report this Comment On December 12, 2012, at 9:58 PM, greenember wrote:

    Apple is a victim of it's own success. With the excessive growth that they had, it's necessary to shed shares of the company in order to keep a well diversified portfolio. Many portfolios became heavy with Apple stock and the only way to regain balance is through sell-off. With all of the recent fluctuations in price, it becomes even more compelling to get the portfolio back in balance so that you're not over-exposed in the event of a real and sustained drop. It's a no-win situation for the share price as more people shed shares to regain balance as they face the potential for big losses (or diminished profits depending on the buy in price) driven by the very same sell-off of shares. Eventually, there will be a balance, but the support level is not clear at this time...

  • Report this Comment On December 13, 2012, at 6:28 AM, grahamsway wrote:

    I put up a blog on the network the other day that mentions a couple of reasons why one might be cautious on AAPL.

    The main one is the significant dependence by AAPL on the iPhone subsidy by the carriers. Up to now AAPL has had it's way with them resulting in huge volume and profit growth.

    However, there are increasing signs this dynamic could be changing. Even a slight change could cause a very noticeable effect on AAPL's results.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2150039, ~/Articles/ArticleHandler.aspx, 8/29/2014 10:05:58 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement