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$35 Billion Ain't What It Used to Be

December 06, 2012 | About:
The Science of Hitting

The Science of Hitting

247 followers
Each time the stock market opens, it’s bound to do one of three things: go up, down, or stay unchanged; the other certainty is that the financial media will always be there to explain exactly why it went the direction that it did (even if they have to resort to quarterly GDP figures out of Belize). On individual stocks, that’s a bit more difficult – despite the fact that there aren’t juicy news stories about the toy industry each and every day, there’s no question that Mattel (MAT) and Hasbro (HAS) will be traded right along with the market as a whole. What exactly this is attributed to is a bit unclear; if every tick has a cause, then there are thousands of companies that trade on an average day without any explanation.

Yet when stocks move in a big way, this goes out the window; certainly there must be a cause, and the media won’t sleep until they find something to tie the movement to. Apple (AAPL) stock fell more than 6% on Wednesday, requiring the press and the analyst community to line up one by one and answer “why.” Here are just a few of the explanations (from Reuters, the Wall Street Journal, CNN Money, Forbes, and others):

Tablet competition – analyst citing “increasing competition in the tablet market”

Margin requirements – “Others cited reports of higher margin requirements at clearing firms”

Capital gains tax rates in 2013 – “several investors said uncertain tax rates on capital gains in 2013 prompted selling”

No special dividend – “some investors who were hoping for a special dividend this year may be disappointed as time is running out.”

Nokia deal in China – “Nokia is to partner with China Mobile, the world's biggest mobile operator, in a sales deal that will give the Finnish company an opportunity to win back Chinese market share from Apple's iPhone.”

Negative technical developments – “Apple’s slide also may be the result of traders predicting a drop after the stock failed to sustain a recent rally, a “classic technical breakdown,” according to Gene Munster, an analyst with Piper Jaffray”

Hurricane Sandy – “Q4 smartphone sales could take a hit from the super storm”

As you can see, there’s no lack of explanation for why the sell-off happened; per usual, when a stock makes a big move, the press and the analysts will be there to quickly tell you why. I find this laughable: Half of the items on this list were known about well before Wednesday, and the others are hardly justification for a $35 billion decline in market value.

As you may have guessed, I don’t have the slightest clue why any stock does what it does from day to day, nor do I believe having a good answer as to why it goes one way or the other entirely explains the movement (just like I can’t explain most 0.5% moves, a move up or down 5% may be due to many other forces than the one currently at top of mind); however, I think there’s one major implication from this nonsense that shouldn’t be overlooked by long term investors:

It’s hard to think long term when you’re paid to do otherwise – As I’ve noted in the past, analysts have a much different goal than long-term investors; as most research reports explicitly explain in the footnotes, analyst generally set price targets twelve months out. When looking over that short of a time period, beating or missing by a penny is life or death. When research outfits target such goals, they will attract clients who are equally short sighted; and when “I don’t know” becomes an unacceptable answer, you start getting explanations like the ones listed above. This is something you shouldn’t take lightly; it’s not a stretch to believe that reading analyst reports can negatively impact one’s ability to stay focused on what matters rather than short-term movements in the stock or in quarterly earnings.

Like most analyst discussions, there is little mention of anything related to the sustainability of Apple’s competitive position in the industry – despite the fact that this is the critical question any owner should be asking. Competition from Android (GOOG) has been present, and will continue to be; Microsoft (MSFT) is coming to market with a differentiated offering, OEM partners, and billions of dollars as well. This was true three months ago with the stock above $700, and remains true with the stock around $540 (why is this only a concern when the stock starts dropping?). If you can’t answer this question, then you really need to ask yourself what you think the future holds as competition strives to unseat the undistributed leader (in terms of profitability) in both mobile and tablets.

This is the real question. If you have a suitable answer, more power to you: The $35 billion drop in market cap - nearly equal to the market cap of Target (TGT) - from a combination of Hurricane Sandy, tax rates, and other nonsense, may provide just the opportunity you’ve been looking for to become a minority owner of Apple Inc.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 4.2/5 (27 votes)

Comments

pcai
Pcai - 1 year ago
I can not agree more. I can not agree more I do laugh every time when I heard business news explains why the stock up or down.

You are absolutely right. "why is this only a concern when the stock starts dropping?" People use the price as only compass, this is why they lost the direction.
20punches
20punches - 1 year ago
Is it possible that the market has finally priced in the No-Jobs discount? I thought at $700, Apple was definitely not cheap. Certainly Apple is not expensive either at 12 times trailing earnings but I've seen things are changing gradually for Apple. Before the iPhone was invented, Nokia was the most innovative cell phone company and it came up with many of the most popular handset such as N95, Nokia 8800 and Nokia E71. Nokia paid its price for not paying enough attention to iPhone when it first came out but I'm wondering whether Apple is doing the same thing now. iPhone is not that exciting anymore and each new generation of the iPhone no longer represents major breakthrough. Tim Cook is not a visionary leader, he's famous for efficient inventory management. Jobs is visionary and I think Apple is a different company without him, it may take a few years for us to see that clearly though.

I'm not saying Apple's share is going downhill, in fact, it is very likely that Apple's stock will shoot up to $700 again. I just think there are better opportunities out there than Apple.
The Science of Hitting
The Science of Hitting premium member - 1 year ago
Thanks for the comment Pcai!

The Science of Hitting
The Science of Hitting premium member - 1 year ago
Jianing7978,

Good point - thanks for the comment!

balajisridharan
Balajisridharan - 1 year ago
It is interesting to see people on TV think that AAPL is the best bet out there in the stock market when it is

a. the largest company in the index (size does become a hurdle at some point) Just to get an idea, AAPL is 5% of the GDP of the United States and larger than Switzerland

b. operates in an environment where technology changes quickly

c. come Jan 1st, they have to sell $150B of new gadgets in 2013 to stay even with this year

d. One has to look at RIM or NOK five years ago and predict that they would lose their shirts in this industry

I am sure there are easier bets out there...
Patience Investing, Inc.
Patience Investing, Inc. - 1 year ago
From Tren Griffin's (trengriffin) Twitter feed: "Mr. Market sometimes forgets to take the librium & in the short term is bipolar. AAPL for example."

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