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Understanding Apple – Last Weeks Fad Is Out, But Should It Be?

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

Apple (NASDAQ: AAPL) is plunging! Again!

Many reporters are running in circles like the proverbial headless fowls. There have been numerous articles questioning “Has Apple lost its mojo?” In the last three months it has tumbled from its all time high of just over $700, to an intraday low of $505.75 (Nov 16).

So let’s look at the chart.

<img src="/media/images/user_13421/chart_aapl_3mo_2012-12-07_large.png" />

[Chart: Yahoo Finance]


The two important points for this discussion are Nov 16 and yesterday (Dec. 6). The data for the two days are:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>16 Nov</p> </td> <td> <p>6 Dec</p> </td> </tr> <tr> <td> <p>Open</p> </td> <td> <p>525.20</p> </td> <td> <p>528.94</p> </td> </tr> <tr> <td> <p>Low</p> </td> <td> <p>505.75</p> </td> <td> <p>518.63</p> </td> </tr> <tr> <td> <p>High</p> </td> <td> <p>530.00</p> </td> <td> <p>553.31</p> </td> </tr> <tr> <td> <p>Close</p> </td> <td> <p>527.68</p> </td> <td> <p>547.24</p> </td> </tr> </tbody> </table>

What they have in common is this:

  • Had fairly large ranges ($25/$35)
  • Opened above $520
  • Dropped below $520
  • Retracted upwards to close near their high

Additionally, they were both high volume days.

Our tech-analysis friends would say that the stock has support around $520 and it now seems to be testing that support.

I believe that tech analysis can be a tool to understanding a stocks movements, but that every signal represents something about buyer sentiment for the stock. So…

What’s Going On?

A couple of weeks ago, one favorite explanation was the fact that with every passing day, it looks more and more likely that we will be seeing a reversion of capital gains tax rate to those before the Bush era cuts. That explanation has become less prevalent, but it is still true.

In October, Bloomberg BusinessWeek wrote Wealthy Advised to Sell for Gains Before Unfriendly 2013. They noted:

Long-term capital gains rates will increase to a maximum 20 percent from 15 percent, plus an additional 3.8 percent for high-income earners as a result of the 2010 health-care law.

They go on to point out that a stock sold at $100 with a cost basis of $20 would yield (rounded):

<table> <tbody> <tr> <td> <p>Today at 15%</p> </td> <td> <p>$88</p> </td> </tr> <tr> <td> <p>New rate of 23.8%</p> </td> <td> <p>$81</p> </td> </tr> </tbody> </table>

If you take the a share of Apple at say $550 and say we bought in at $150 (July 17, 2009), then this is a $400 profit. To sell one share then, the proceeds would look like this:

<table> <tbody> <tr> <td> <p>Today at 15%</p> </td> <td> <p>$ 490.00</p> </td> </tr> <tr> <td> <p>New rate of 23.8%</p> </td> <td> <p>$ 454.80</p> </td> </tr> <tr> <td> <p> </p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p>Difference</p> </td> <td> <p>$35.20 | 9.28%</p> </td> </tr> </tbody> </table>

So the tax rate change has a negative affect of $35 per share for those who got in at $150 - even more if the stock passes $700 again.

So if someone owns 10,000 shares, the savings is $350,000. That is a lot of money.

The sharp drop in the daily price, then the quick rise again represents the fact that there are those who have sold and have decided to buy back in, and the sellers have decided that it is not worth selling below the “support level” as the savings in taxes do not warrant the loss in price.

Now just because we hit this spot once a few weeks ago, does not mean that the dynamics have changed. In fact, as we near the deadline, there is even more pressure for those who have not taken profits to do so.

This downward pressure on the stock has been amplified by several factors

  1. Apple has appreciated more than almost any other big cap stock,
  2. The share price just touched an all time high while crossing a $100 multiple ($700), and
  3. There has been a significant amount of negative news on Apple.

It should be noted that Apple is not alone in sinking over the last 3 months. Its high-tech compatriots have also Google (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT), and Dell (NASDAQ: DELL) are all down in the time period as shown in chart 2, albeit buy much less. Google and Dell have mostly recovered. But this is not surprising. If a driving factor is the avoidance of excessive capital gains tax changes, over the past two years Google has gained only about 20% against Apple’s 75% (topping over 100% before falling). Dell’s share price has fallen 25% - no profits to take there!

<img src="/media/images/user_13421/chart_aapl_vs_gmd_2012-12-07_large.png" />


While multiple forces are driving Apple's share price down, the impending change in tax structure is probably one the strongest. This, however, will come to a definitive end on Dec. 31. Until then, however, I would expect to see the $520 price level "tested" a couple of more times. 

Meanwhile, Apple seems to be have a gangbuster holiday season, so January’s pre-earnings season could see a very strong rebound. With prices depressed by these external forces, the rise could be dramatic.



Related Article: Apple Physics - What goes down must go up.


Malcolm Manness has a Masters degree in Computer Science, and worked for 14 years in development, technical publications and software quality assurance. He has been investing for 20 years. Currently, he does writing, and FileMaker Pro programming on contract.

His short fiction can be found (under pseudonym J. Seunnasepp) at http://50centflash.com/.


==== Understanding Apple series

You may love Apple and their products, or hate them to the core, but you cannot deny that Apple now has the highest market cap of any company, their products are trend setters, and currently they are trading at rather low multiples, especially regarding forward earnings.

Warren Buffet has the maxim: “Invest in what you know!” So, for those who want a unique perspective on Apple’s success, I have a series of articles Understanding Apple. I hope you will find them helpful and provocative.

Let me know what you think.


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