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Unless you've been off planet for the past few months, you'll have been witness to the dramatic drop in the share price of Apple (NASDAQ:AAPL). From a closing high of $702.10 in mid-September to a closing low of $525.62 in mid-November, shareholders, including the Messed-Up Expectations portfolio, have seen a 25% drop in the value of their holdings.
Explanations for the drop abound. Among these is "Mapgate," in which the new mapping app from Apple reportedly couldn't find its way out of a cardboard box. Okay, I'm exaggerating there, but locations were wrong and directions were reported to be less than optimal.
Then there was the firing of a senior Apple executive, iOS chief Scott Forstall, because he wouldn't sign the letter of apology Apple released after Mapgate. That was part of a bigger executive team shakeup.
There were also supply problems for the new iPhone 5, as well as Apple "missing" Wall Street estimates after it had consistently beat them quarter after quarter. (To my mind, that says more about those making the estimates than anything about Apple's performance.)
And of course, we have increased competition from smartphones running Google's (NASDAQ:GOOGL) Android system, tablets from Amazon.com (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) -- the new Surface is getting some favorable reviews , actually -- and the bloom is off the Apple rose.
All of those seem reasonable explanations for a share price drop, but they're not much more than what any successful company goes through. Given the margins Apple has been enjoying with its iPhones and iPads, is it any wonder competitors are eager to get in the game? And is it reasonable to assume that Apple will never make a mistake with a new product?
Is that all?
To me, I think there are a couple of non-Apple reasons for the share price decline. First: Uncertainty about the U.S. tax situation come Jan. 1. We don't know what the capital gains tax rate might be until the federal government gets its act together and resolves the issues surrounding the fiscal cliff. So, a lot of people and institutions who've held Apple's stock and made quite a bit of money (shares were up as much as 74% this year) are selling now. They're willing to pay the current tax rate on the gains rather than selling later with the risk of paying a higher rate then.
Second: Mandated selling, as pointed out by Jason Schwarz. Apple is probably the most widely held stock -- ever. Why not? It's been very successful as an investment, especially since its $79 low back in Nov. 2008. Many institutional investors (you know, the really "big" money) are only allowed to hold a position as long as it remains below a certain percentage of the total (e.g. 8%). As Apple rocketed up over 700% from that low (and is still up over 500%), they've had to sell shares to get back in line with those requirements. And, as we approached and passed the fiscal year end for many mutual funds (often Oct. 31), many funds that had made money from Apple likely began to sell their holdings in order to rebalance and get the holding back under the allowable limit.
Result? Lots and lots of shares coming onto the market, which, as inevitably happens when supply outstrips demand, drove the price down.
It's a MUE
These two reasons lead, I believe, to the sell-off being a messed-up expectation, because it isn't driven by fundamentals. The company has boatloads of cash, no debt, high growth in revenue and earnings despite competition, and a P/E ratio that is seemingly laughable for a company in its position.
Once the selling pressure eases (and I think it might have already begun), those who had sold for tax reasons or to rebalance will start buying shares again, moving the price back upward.
Accordingly, I'm going to buy more shares of Apple for the Messed-Up Expectations portfolio. Come and discuss this and other investments on my Messed-Up Expectations discussion board, or follow me on Twitter.
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