Seeking Alpha
Brian Nichols, NicholsToday (504 clicks)
Value, research analyst, biotech, author
Profile| Send Message| ()  

On Tuesday I was watching CNBC as shares of Apple (AAPL) slipped below $500 for the first time in 11 months. Of course, all talk surrounded how to play it, how low it could drop, and if now is the beginning of the end for the tech giant. These talks have progressed throughout the last four months, since the launch of the iPhone 5, and have become ever-so opinionated. However, one discussion, or one question, that really got me thinking was when Herb Greenberg asked the question, "where are investors putting their Apple money?"

In the last three months Apple has lost 23% of its value, of nearly $140 billion of its value. From all-time highs the stock has lost an additional $50 billion, but for arguments sake, we are just looking at the last three months. This fact, this $140 billion decline, has left me wondering, where have investors put their money, and is it so outrageous to consider that there could be a correlation between Apple's lost value, the gain in value of others, and determining both a top and bottom for those stocks affected? Allow me to explain:

Company

Ticker

Three-Month Performance

Research in Motion

(RIMM)

85%

Green Mountain Coffee

(GMCR)

77%

Alcatel-Lucent

(ALU)

67%

Nokia

(NOK)

64%

Netflix

(NFLX)

54%

Ford Motors

(F)

38%

Dell

(DELL)

33%

Micron

(MU)

31%

First Solar

(FSLR)

31%

Hewlett-Packard

(HPQ)

15%

Is it outrageous to suggest that investors have taken money from Apple to reinvest elsewhere? Many of these companies such as Ford and Netflix have been driven higher due to fundamental catalysts, but for the most part, all of these companies have underperformed throughout the Apple era. Of course there are the exceptions such as Netflix and Green Mountain, but doesn't it seem somewhat odd that all of these companies (especially Nokia and Research in Motion) have rallied during Apple's fall, and that each of these companies was underperforming prior to Apple's decline?

The 10 companies above have added nearly $43 billion total in market capitalization, or an average of $4.3 billion per company. The largest of this bunch is Ford, which is the most difficult to connect to Apple, therefore, minus Ford these companies added $3.1 billion in average market capitalization. However, as you can see, although Ford's rally has been impressive, it's not near as aggressive as the performance of the top five on this list. Nor is it as impressive as the two highlighted in bold, Nokia and Research in Motion; two companies that have benefited greatly from Apple's decline.

What does all of this mean? To me, it means that there could be a connection between the downtrend in shares of Apple and the uptrend of these 10 stocks. I don't think it's unimaginable that as investors removed $140 billion, from Apple, that they sought value elsewhere. Nokia and Research in Motion have almost traded in the complete opposite direction throughout Apple's five-year rally. Furthermore, it makes sense that if investors believe Apple's era is coming to an end that they would search for other holdings in the same industry. According to Bernstein's December analysis of 800 mutual funds, 77% of growth funds owned Apple, compared to 82% last year. Perhaps this combination of a falling sentiment, funds selling shares, and retail investors seeking value, has made Nokia and RIMM more attractive as a value investment.

So how can I use the information? Here is where it all comes together, and here is my personal theory: Once Apple reaches a bottom, investors will take money from these other investments to reinvest into Apple (the trend will reverse). We may not see this with companies such as Ford or Green Mountain, but then again, the $140 billion taken from Apple was so massive that it most likely was split into the investments that have been top performers. So although it may not seem like some stocks are connected to Apple, perhaps some still benefited from the overload of money that was made available to invest elsewhere.

In the last three months we've seen several false alarms of an Apple reversal. Typically when a stock loses 25-30% of its value there is a cooling off period, a period where the stock trades flat. Therefore, it could be awhile before this trend ultimately reverses. But as an investor who specializes in behavioral finance, I do believe that there will come a point where the value will become too apparent in shares of Apple and investors may once again make the switch from stocks like RIMM and NOK to invest in Apple.

Conclusion

In my book, "Taking Charge With Value Investing", I talk in great detail about using trends and understanding the behavior and tendencies of investors to find good entry points in value investments. I present countless strategies to help people find these values, which in many cases, is a result of knowing and identifying tendencies. And in my opinion, the psychological connection between Apple falling and these stocks rising is too apparent of a long-standing behavioral tendency not to take notice. Therefore, the question once again becomes at what price is Apple getting too cheap for it to continue falling?

Could Apple fall to $450 and stocks such as Research in Motion continue to rally on speculation, sure. Could Apple immediately reverse and trend higher to $650, absolutely! Is it possible that all 10 of the mentioned stocks will continue to rally even when Apple reverses, I say, "yes it's possible". But, due to my understanding of human behavior and the humanistic decision making process when faced with money gaining or losing decisions, I do think there is a connection between certain stocks that have ticked higher and the loss of Apple. Most people simply don't have the patience or discipline to let money sit without action, and I think that all investors should pay close attention to the trend of Apple and the performance of these stocks over the next few months; as Apple reaches a point where valuation can hardly be explained.

Source: Stocks That Have Benefited And May Falter Due To Apple's Volatility