Apple's stock has continued wavering in the marketplace, closing below $400
for the first time since mid-April on Wednesday and down some 43 percent from its all-time high of $705 nearly a year ago. While still trading higher than it was at the time of former CEO Steve Jobs' passing, many investors are puzzled at why a company with very solid fundamentals, a newly-announced generous dividend
and buyback program, and a low price-to-earnings ratio would be doing relatively poorly. According to a new analysis of the stock
, the problem is emotion.
's Robert Weinstein believes that casual investors -- those who got in because the company was doing so well financially and don't really understand its unique culture -- are bailing on AAPL in the short term because the company has put off announcements about any of its most profitable products until late summer or the fall
. While the next iPhone and iPad models are of course expected to do very well and are highly profitable, the company's decision to stick with a more-or-less yearly release of its two largest moneymakers keeps investors nervous about improvements made by the competition.
In part the problem is one of Apple's own making. By being secretive and investing a lot of emotion into its products, the company fosters a culture of irrational expectations and emotional speculation rather than a a calm analysis of the company's fundamentals -- which, Weinstein says, are strong. While AAPL is trading near its 52-week low, he points out that Apple's month chart -- which he relies on as a better gauge that is less likely to be as influenced by emotion -- shows rising 60-, 90- and 200-day moving averages, with the stock still selling above the moving average.
Speculators may indeed be exerting influence to try and drive the stock down deliberately, hoping for a spectacular rise when the known future announcements -- new iOS 7, new Mac OS X, new iPhone and iPad hardware -- come to pass in the fall, leading up to Apple's busiest time of the year, the holiday season. Nearly four years after the iPad debuted, it is still without peer in the tablet market and is Apple's fastest-growing product line. While Apple faces tough competition from a variety of Android devices both in and outside the US, its market share in North America is rising
-- which may foretell a turning of the tide in other regions, particularly if a rumored "low cost" iPhone model becomes available, never mind any completely new products like the alleged Apple HDTV.
"You're making a substantial mistake if you underestimate the role emotion plays in pricing securities," Weinstein writes. "A stock can gap higher a the open, fall below the previous day's low and then spring back to close at a new high. Obviously the underlying company didn't change in value in a single day ... the force moving the share price is emotion." He adds that while it is easy to see the impact of emotion during a single day, "investors should know that the same applies over the course of days and weeks."
Weinstein hints that Apple's current stock price may not be as "out of whack" as some might think, inferring that the rise to the $700 level was an emotional reaction that drove the stock "too far too fast." Strip away the hype and speculation, he says, "what you're left with is a rising stock with solid fundamentals." That said, he adds that "it doesn't invalidate the Wall Street adage that 'the market can remain irrational longer than you can stay solvent'."
For those who are willing to hold on until the inevitable holiday season improvements but cannot risk further stock price degradation, Weinstein offers an alternative: hedge the stock with call options rather than selling. He offers the following example: "An Apple investor can sell September $415 calls against the shares owned for about $13. By hedging with call options instead of selling your shares today, you give yourself another $13 of cushion during the summer months to wait and see what the next earnings release brings, and give the market sentiment a chance to change. You also collect on the next August dividend payment."
"Based on the last $3.05 distribution
[per share], you then have $16 that Apple needs to fall before breaking even on this strategy," Weinstein writes. "On the other hand, if we are near the bottom and shares are trading above $415 on expiration day, you can simply buy back the options at the going price. With your gains from the stock appreciation, dividend, and initial option premium, you're fully covered. In fact, if Apple is above $415 on option expiration day, you will gain about $30 more than if you had liquidated today."