Don’t Blame Institutional Selling for Apple’s Slide

Diane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A cache of financial heavyweights, with more than $100 million in equities under management, deftly dumped Apple (NASDAQ: AAPL) during the fourth quarter of 2012.

Banks, insurance companies, hedge funds, and pension funds shed millions and millions of shares. Among the big institutions that sold Apple were Capital World Investors, which sold 4.9 million shares; Fidelity Management and Research, which got rid of 4.3 million shares; Capital Research Global Investors, which discarded 2.9 million shares; Wellington Management, which sold 2.3 million, and Marisco Capital Management, which shrugged off 1.9 million shares.

Bearish option activity was also brisk in the fourth quarter, with powerhouses like Goldman Sachs and Susquehanna International bulking up on puts.

The common conviction is that major investors exert tremendous influence over stock prices. They buy and sell in large blocks, potentially influencing a stock’s movement up and down. And it's true that swings in institutional demand has a larger effect on stock prices than swings in individual demands. And when a plethora of large investors buy or sell, a stock’s movement is accelerated or decelerated even more.

But not so fast. Studies show the effects are most pronounced when the heavyweights target small caps and thinly traded stocks, not giants like Apple. So don’t blame Apple’s slide too much on Q4 institutional selling.

A Harvard University and University of Illinois study entitled “The Impact of Institutional Trading on Stock Prices” found no consistent evidence of a significant or positive link between changes in institutional holdings and simultaneous price swings.

The study further pointed out that institutions vary in their strategies and rarely play follow the leader, and by and large offset each others movements.

This could explain why there was heavy selling in Apple in Q4, and there were also plenty of bargain hunters snapping up shares as Apple’s slipped. But the robust buying failed to stave Apple’s steep and steady slide. In Q4, Citigroup added 1.8 million shares to its stash to reach 7 million shares. Germany’s Commerezbank Aktiengesellschraft bought 1.5 million for a total of 2.8 million in its portfolio. Credit Suisse added 1.5 million bringing its tally to 3.4 million. Vanguard Group bought another 1.1 million shares to reach a whopping 42 million, and Nataxis bought 1 million to reach 1.3 million shares.

The sellers’ timing looks impressive given Apple's tumble some 25% from its high hit on Sept. 21, 2012 of $705.07 through the end of the year. The buyers’ timing doesn’t look so savvy given that Apple shares have slumped another 12% year-to-date.

Savvy individuals and institutions sell for several reasons, but they only buy for one—they expect shares to move higher.  So while its quite likely sellers were taking profits to book for year end, its also probable they saw some red flags flying. Apple’s 2012 performance up to September was unquestionably stellar and the stock rewarded shareholders well.

These intuitions probably saw Apple’s stock getting ahead of itself, the saturation of the smartphone market, and fewer first-time buyers, and grew concerned over slowing iPhone 5 sales. Definitely not sound grounds on which to buy shares.

Rivals Samsung and Google (NASDAQ: GOOG) continue to ring up sales and take market share from Apple. Data released from research firm Gartner reports Samsung’s Galaxy unseated the iPhone in 2012 as the best selling smartphone. Samsung sold 394.6 million mobile phones last year, with 53.5% of those being smartphones. Apple sold 130 million worldwide.

For 2013, Gartner predicts global smartphone sales will continue to be strong, with about 1 billion units changing hands. A great deal of those sales are expected to come from emerging markets. So if Apple can move quickly on a less expensive smartphone, it stands to benefit. But in the near term Apple may have to grapple with choosing growth (via lower-priced models) or preserving margins by sticking with high-priced models.

Yet even a lower priced model might not be the fix Apple needs. On the operating front, Gartner reports Google’s Android still rules, and has widened its lead over Apple’s iOS.

Furthermore, the Wall Street Journal just reported Google is in the midst of launching retail stores in the U.S., a move that will surely add to its prowess and heighten its stance against Apple.  Apple's retail stores have added nicely its bottom line and success, kicking in more than $10 billion in annual sales. That kind of hefty profits underscores the potential for Google retail stores.  Google is also swiftly and smartly becoming a prominent presence in the mobile device market. Shares of the internet company hit an all time high of $804 intra-day Feb. 19, as Apple shares continued to slide.

In addition, the much-anticipated BlackBerry 10 from BlackBerry (NASDAQ: BBRY) is set to hit U.S. markets in March. BlackBerry fans are a loyal bunch and they have been clamoring for a new souped-up version of the phone. Those who covet the BlackBerry keyboard won’t even look at another phone. Plus, in an effort to keep government departments and businesses appeased, BlackBerry is launching new software that will work on a variety of smartphones, in addition to its own. As Apple has lost some of its cachet, BlackBerry has regained some bounce in its step. BB10 sales will chip away at Apple’s market share.

So while many may see “smart money” selling as a big reason behind the big bite taken out of Apple, at the core there is much more to Apple's waning performance and its stock's swoon.

DianeAlter has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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