I have a confession to make: I'm an Apple (NASDAQ:AAPL) bull. Unabashed but lacking confidence these days, as it remains clearly apparent that the bears are firmly in charge at this juncture -- but still a bull nonetheless. We Apple bulls are currently an endangered species, as shares have now tapped fresh lows not seen since last January and the stock approaches losses of 40% from its all-time highs less than six months ago.
Notable finance professor Aswath Damodaran has also long been an Apple bull, except the academic guru actually sold his shares nearly a year ago in April 2012, somewhere in the range of $600 per share. This exit is particularly notable because Damodaran had originally bought Apple way back in 1997 (the same year that Steve Jobs would return to the company) and sold after 15 years of loyal ownership.
To be clear, Damodaran had not lost his faith in the underlying business or what should really matter. Far from it. In fact, he constructed a discounted cash flow model at the time that valued Apple at $710, which proved to be rather prescient, as nearly six months later shares would top out at $705 -- within 0.7% of his estimate. Even though he considered shares undervalued at the time, they were less undervalued than normal.
No, what Damodaran lost faith in were his fellow Apple shareholders.
Losing my religion
There are three primary reasons this Apple bull chose to sell, which are somewhat related.
For better or for worse, Apple has become almost entirely a momentum stock. Shares rallied not necessarily because they were undervalued, but simply because investors were playing the upward trend. The trend is your friend, so they say. The trouble, though, with momentum stocks is that they cease to trade based on fundamentals and move primarily on irrational emotions.
As Damodaran puts it, a momentum stock "delinks price from intrinsic value." Momentum is for traders, while intrinsic value is for investors. As an intrinsic value investor, Damodaran didn't think he had an informational edge anymore.
The second reason ties into the first. Apple's movement is now dominated by institutional trading, and institutional investors are notorious momentum traders. They tend to buy on the way up and sell on the way down, making moves more pronounced. Institutional selling has indeed played a large role in Apple's pullback.
Lastly, the initiative of a dividend has signaled a change in Apple's investor base. Before, it was a favorite among growth investors seeking capital appreciation, but it was becoming a candidate for value investors looking for income. It has become increasingly difficult to satisfy both of these investor groups simultaneously. In another clairvoyant prediction, Damodaran thought Apple could have easily addressed the cash problem once and for all with a "shockingly large" buyback program instead. By opting to institute a modest dividend and repurchase program, he thought Apple was simply prolonging the cash distraction. How true that's proved to be.
Back to the future
That was then. How do Damodaran's musings from nearly a year ago relate to Apple's current predicament? For current Apple investors watching shares plunge daily and pondering what to do, Damodaran's rationale holds up.
The only reason for bulls to sell now is if they see additional downside in store. It should be painfully obvious by now that all rational considerations no longer matter when it comes to trying to value Apple. The single-digit P/E; inevitable dividend increase; global tablet opportunities; entirely new product categories waiting to be tapped; unprecedented growth in China. None of it matters.
Right now, all that matters is where other investors think Apple is headed. Right now, investors think that Apple has nowhere to go but down, a perception that's being perpetuated by a consistently negative news cycle. Investor sentiment needs to change before shares can recover, to say nothing of the actual business. Then, and only then, will the sell-off end.
As far as Damodaran is concerned with recent trading activity, he believes that there's a 90% chance that shares are undervalued. His post from last April has proved to be absolutely spot-on in more ways than one; will he be right again?