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Apple: The Inertia of Opinion

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

Few companies and their stocks are more written about, talked about and debated than Apple (NASDAQ: AAPL). This stems in part from the company’s position of dominance in the market and partially from the intense emotion that the company and its products evoke in consumers and investors. As you consider the breadth and direction of the coverage that the company receives, an interesting trend can be observed: the prevailing opinion of the stock present in current coverage tends to be a lagging indicator that supports taking a contrarian approach. While this is by no means a scientifically rigorous study, Apple followers may see its anecdotal appeal and wish to include it in their thinking. As things currently stand, opinion is very bearish making the stock a buy.

The Volume of Opinion

In one of the more insightful articles I have read in recent memory, David Wismer, a Forbes contributor, reviews and analyzes much of what the current “Experts” are saying about Apple. Rather than trying to recount the general tenor of the chatter-sphere with the same level of eloquence, I would simply invite you to read his piece, “What The ‘Experts’ Are Saying Now About Apple Stock.” The article covers many of the most highly regarded Apple analysts and commentators.

His ultimate conclusion is that every conceivable opinion is in circulation, but that as Apple rocketed to $700, the general consensus was that the stock could not be stopped. Now as the stock has fallen, while there are a great many writers who proclaim each new step down to be the “perfect” entry point, the overriding theme is that the stock deserves its fate. To the extent that Mr. Wismer makes a call on Apple, it is to say that the chart supports a bottom around $435, but he quickly provides arguments against this level as well.

The Contrarian View

The one opinion noted in the article that bears repeating here is the argument for taking a contrarian approach offered by Aaron Task of Yahoo Finance:

Generally speaking, when a company is being vilified in the popular media like this, it’s usually closer to the end of a decline vs. the beginning. As Apple bulls like to point out, the stock is cheap, trading with a trailing P/E of 12.3 and a forward P/E of less than 10 based on forecasted earnings for fiscal 2014. Both measures are well below the S&P 500 multiple, even as Apple is growing much faster than the index.

While I agree with the specifics of Mr. Task’s arguments, placing the comment into the overarching framework is of greater interest. For as long as professional traders have been studying markets, there has been significant evidence available that supports the idea that when the herd joins a trade, the end is in sight. In general, it seems as if commentators can be broken into very specific groups, particularly where Apple is concerned:

  • the perma-bulls can never find fault with the stock and talk it up under all circumstances
  • the perma-bears never see the positives and believe the company is permanently overvalued
  • the momentum traders develop increasing conviction based on the prevailing direction of the stock
  • pure contrarians go against the grain regardless of the direction of the stock
  • the realists try to make measured judgments about the stock and react accordingly

The beautiful thing about these divisions is that every voice believes that he or she fits into the last category; who would admit to blindly following any of the other disciplines? But does the Apple fan who calls for the stock to breach $1000 because “people buy iPhones because they’re cool,” have any more rational approach than the Google (NASDAQ: GOOG) Android supporter who sees no similarity between Samsung products and Apple’s?

Google supporters suffer from this same phenomenon, just as do Amazon (NASDAQ: AMZN) nuts and Microsoft (NASDAQ: MSFT) loyalists. There are real arguments that Amazon’s model of shipping Kindle’s near cost may hurt the company, just as the fact that loading Windows onto the Microsoft Surface tablet takes up a huge portion of memory is a problem.  The inertia of opinion applies to most companies that have loyal supporters and are widely covered.

Using This Information

The opinion engine tends to operate like any large machine – it takes a while to get moving in one direction and is hard to stop once it does. This means that it changes directions very slowly and lags the shifts that can be made by the market in the stock’s price. As a lagging indicator, you can gain some insight by following the general sentiment of the prevailing opinion and becoming wary when it becomes increasingly one-sided. That said, it is imprecise and should be but one of your tools if you wish to legitimately fall into the realist category. For the record, I believe the realists are the ones that make the most money. Given where opinion seems to be, the stock is a buy at current levels.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Amazon.com, Google, and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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