Apple (AAPL 1.62%) 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 (NOK 3.62%) has popped 133% since bottoming out in July. Research In Motion (RIMM 2.62%) 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 (MSFT 2.51%) 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 (GOOG 2.30%) 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.
