Ever since Newton was struck by the proverbial apple that allegedly inspired his law of gravitation, humanity has realized that what goes up must come down. We have heard this phrase bandied about a lot lately in reference to a different Apple (NASDAQ:AAPL) which has taken quite a beating lately, losing 25% of its value since its peak at $705 in September.
Cult of Mac notes:
"No individual investment can defy gravity," said the deputy chief investment officer for Wells Fargo, Erik Davidson.
Stocks are not physical objects, they are prices on a company that runs an ongoing business that makes money (hopefully). As such, they persist in perpetuity. Surely SOME meet a demise even after a successful run. True as well, that very few retain a dominance in their field for a long period of time, and this is especially true in high tech.
This, however, is far from a Law of Gravity - a constant force that will accelerate another body until it returns to earth (given an earth-centric frame of reference).
There is also the old adage that in the end the market is rational. (Well, given the ability to drive itself into the ground á la 2007-8 we may question this.) The key point here is the "in the end" part. Short term, the market may act irrationally, but eventually, it will give to a company something fairly close to its "real" value.
"Must come down" - again POPPYCOCK! I counteract this with the claim that with Apple (at least for the next couple of years):
What goes down, must go up
(Sure, the world will come to an end in some billion years when the sun goes supernova, but this is not the kind of thing we are talking about.)
Look at Ford (NYSE:F) - it hit a low in 1981 of $1.02 (earliest data I could find was from 1977) It has been in business over 100 years, yet even in the worst days of the 2008 disaster, it only went down to $1.26 (11.19.2008) and rebounded rapidly so that by 22 April, 2009, it was back over $4 permanently. Hardly the law of gravity!
So then why is Apple down so much? Did it lose money last quarter? No. Did its business contract? No - it continued to expand (though perhaps slower than the torrid rate of the past).
Well, as many have pointed out, the whole market is down significantly over macro news - from Israel attacking Gaza to European debt crises, to the "Impending Fiscal Cliff." Then there was an onslaught of negative Apple news: Scott Forstall leaving, disappointing iPhone sales, blah, blah, blah.
The one big idea to my mind is the overwhelming likelihood that the capital gains tax rate will go up next year from current 15% to 20%.
Not only does this offer a plausible explanation for the market as a whole, but it further explains why Apple has been hit particularly hard.
Lets suppose that you bought 1,000 share of Apple a year ago, on 21 Nov, 2011 at $370. While this is out of the range of the average American, it is hardly an extraordinary investment. At a recent price of $570 you have $200 per share profit, or $200,000. The impending extra 5% tax would cost you $10,000. Not chump change.
What if you bought in three and a half years ago, on March 18, 2009 when it crossed $100 for good? Then you would have a profit of $470,000 and the 5% would equal $23,500! Sounds like a pretty good reason to take your profits now!
In the terms of physics, this is a pretty strong force driving sales and hence the stock price down. But what happens when this sales pressure is relieved? Then we hit the trampoline and the MY law jumps in and the price returns rapidly to a more realistic value. (Already today it is up over $16.)
Let's face it, does anybody really believe that Apple deserves a price that has a PEG ratio of 0.48?
Jason Schwarz calls it "Apple s Institutional Slingshot."
I call it Apple's law of anti-gravity. What goes down must go up.
Apple's share price has been driven down by a number of external pressures. Yet the company is continuing to grow both revenues and profits. Thus, the share price also needs to grow accordingly.
Related Article: Apple Strikes $4 Billion Android Gold?.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.