When the market sneezes, Apple stock catches a cold

[Click on the graph for a larger version]

One of Blackfriars' loyal readers wrote yesterday to ask,

AAPL has been WAY down. Is it just the bear market or is there trouble brewing. Any recent news on Leopard or the iPhone that isn't widely known yet?

My short answer: Despite the dire look of August's AAPL price declines shown above, this is just a correction at this point. Personally, I don't consider it anything to worry about. I haven't heard any news of Leopard being late and products being changed (other than the rumor that iPods shipments are slowing in anticipation of the iPod refresh I am predicting for next month). As people have commented on the blog, I think Apple's mortgage bond holdings are already fully discounted. ;-)

My own Analyzing Apple report series predicted large volatility going into August, although I hadn't expected the mortgage credit crunch that seems to be affecting prices globally. As a point of comfort, the average stock varies about 50% in price over 12 months. The 12 month low for AAPL today is 65 as shown in the chart. The 12-month high at this point is 148. Apple has varied more than the average, but it is not anywhere close to out of whack. It's just being slammed by the overall market. And Apple stock has a beta greater than 1. That means that any move in the larger market is amplified in Apple's stock price.

One other factor that's affecting AAPL in this correction is the hedge funds. They use borrowed money (leverage) to make investments. If those investments fall, they will get a margin call asking them to put up more collateral. Often, that means selling stocks that they have big profits on. Guess what stock has been very profitable this year? Yup, AAPL. So the margin calls as a result of the credit crisis indirectly causes hedge funds to sell AAPL. That's sad, but true.

Today is options expiration day, always a volatile stock day, and the Fed cut its discount rate, meaning there's a pretty big rally coming. As I write this, the market just opened, and the Dow is up nearly 300 points and AAPL is up almost six. But the reality is that despite the Fed move, nothing has changed. At the end of every day, month, or year, the thing that most affects AAPL stock price is how many people want to buy its products and how well it runs its business. At some point, investors will reassess and discover that where a few months ago they had to pay 40 times Apple's earnings for the year, they now only have to pay 30 or so. Just as iPod and Mac sales don't happen very often, neither do Apple stock sales like this one. It's just a matter of time waiting for buyers to notice.

Full disclosure: the author owns Apple stock.

Technorati Tags: Analyzing Apple, Apple, Financial analysis