Is Apple Using Share Buybacks To Support Its Stock Price?

Apr. 9.13 | About: Apple Inc. (AAPL)

A ceiling, or in this case a floor, can be supported by many means. A properly placed bearing wall or column is ideal, but a pile of books might also work for a while. In the same way, a stock can be supported by real demand from outside investors or by an aggressive and focused share repurchase program. Three separate events over the past several weeks have led me to discern that Apple (NASDAQ:AAPL) could be protecting its stock price with smartly timed and heavy share repurchases. However, the program was not designed to do so and thereby has its limitations. This dirty little secret will likely lose its punch. The stock should break its recent $419 low before finding $400 in the near-term in my view.

Apple shares have risen three times now on days when logic says the shares should have declined. Here's one possible reason why: A very active and targeted share repurchase program is possibly being employed for the special purpose of supporting the stock against challenging news and days. Apple introduced a three-year share repurchase program intended to counter share based employee compensation plans. It's a $10 billion endeavor that when concentrated can impact share price. I think it has become multi-purposed, and is being employed to counter the effects of bad news that might challenge AAPL's share price on any given day.

I believe the most recent event occurred a week ago when Apple rose sharply for a portion of the day against news of a Goldman Sachs action removing it from its conviction buy list. When a major broker expresses concern about an idea weeks before its earnings report, it sends a message. That message would normally be received as intended, so a negatively directed statement should have driven a downward share price action. Instead, Apple was higher into the afternoon.

How else can we explain the contradiction, if not by internally generated synthetic demand for the shares? Obviously, there is also real institutional interest in the stock at bargain pricing, but you would expect to see those interests buy after the news has damaged the stock, not at the same moment. See the stock's price movement for yourself here. It's notable that despite the early strength on April 2, AAPL support still gave out by the close of trading.

Chart forApple Inc.

Chart at Yahoo Finance

A few weeks ago, Apple rose on Samsung's (OTC:SSNLF) big day, when it introduced the Galaxy S IV. The Samsung event was exciting, and in my opinion, brought to market a new product with enough new innovative appeal to pose a challenge to Apple. Some said Apple rose on the day because of a weak new product offering by Samsung, but I believe any close inspection of that product or Samsung's market strength reveals that's not the case. Yet, Apple shares rose on that day as well. Similarly, on March 22, when BlackBerry (NASDAQ:BBRY) introduced its Z10 phone to the United States, Apple shares climbed 2.0% or nearly $10. That marks three separate days Apple shares rose when the news was generally counter to its cause.

In my opinion, Apple's shares have basically been supported by rumors and illusion lately. Rumors about new products and returns of capital to shareholders reversed the downtrend in place since last fall. However, in a recent work, I vocally noted my contention about the assumed value addition through a dividend increase and the message that would send to investors. In my view, Apple has probably supported its shares through repurchases, but the evidence shows that its ability to do so is limited, given the example of last week's failure and downslide into the close. Now that Apple's little secret has been exposed here, it's entirely possible the stock will break its recent low of $419, and in my opinion fall to $400 or lower with so much lead time to its April 23 EPS report. Only real news of product innovation at or before its EPS conference call can give the stock solid support.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.