A common sense interpretation of Apple (AAPL) fundamentals leads most investors to conclude that this stock should go straight up. Mac sales are up 74% in October and November, the iPhone is on track to have its first quarter of 10 million unit sales, the iPod Touch continues to gain market share among gamers, the Tablet will be released in 2010...but for some reason the stock sits dormant in December. If only investing was so easy. Common sense wins in the long run but the short run can be dominated by sophisticated trading strategies that test your conviction; Apple happens to be the investment vehicle of choice not only for the longs but the shorts as well. For many of the same reasons you love Apple stock, they do too.
Here are seven reasons why investors love to short Apple:
1- Apple is the market leader. I don’t mean Apple is the leader of the PC market or the smartphone market, I’m talking about the stock market. The Dow would have hit 11,000 by now if Apple was having a strong December. This one stock has become so important to the market that its action is contagious. This influence makes Apple a prized possession for both the longs and the shorts. Knocking down an easier target like Research in Motion (RIMM) or Citigroup (C) doesn’t generate the same snowball effect. This begs the question, why would anybody want to keep a strong stock and a strong market down...which leads us to #2.
2- Apple always bounces back. If you can keep a good stock down then you are able to load up for the ride back up. It’s like a slingshot. The harder you pull, the more propulsion you generate. Over the long run, Apple fundamentals will certainly take the stock higher but hedge funds want to maximize the ride. Keeping a great stock down allows them to profit from quick predetermined trades rather than being fully invested all the time. If they can control the price action on the downside, they can take even bigger risks during the inevitable periods of upside momentum. After riding the Apple slingshot, the hedge funds go back and do it again and again.
3-The predictability of Apple reduces a short’s risk. Everyone on earth knows when the next iPod, iPhone, and iMac refreshes will hit. This has turned into a calendar driven catalyst stock. During the quiet time, the stock is vulnerable.
4- New media has changed the game. Anybody can say anything and the masses will believe it. The topic of Apple currently dominates this new media. There is no accountability or verification of sources like the old days. In such an environment, hidden agendas can be pushed endlessly without disclosure. On any given day you will find twenty different articles written about Apple with 99% of the content being speculative in nature. The stock responds to this outside speculation in the absence of official clarification from the company.
5- Apple secrecy. As the unparalleled leader in tech innovation, Apple feels that it is necessary to keep future products veiled to all competitors, consumers, and investors. I’m not here to criticize Apple for this practice because it certainly has its merits, but it does open the stock up to volatility. Apple has yet to sell a single Tablet and yet hedge funds have already made millions from rumors surrounding the product. The lack of transparency from Apple creates a perfect storm for short term traders.
6- Apple innovation. This company is so good that it causes imaginations to run wild. A hedge fund could float a story that Apple is thinking of buying Saturn in order to develop a new brand of Apple cars and people would go nuts. The name Saturn would instantly become a symbol of quality and innovation. If they floated a similar rumor about IBM, investors wouldn’t be as quick to jump. The constant innovation coming out of Apple provides traders with endless material for believable speculation.
7- Steve Jobs is the visionary of the century. This one man is the single greatest asset in corporate America which causes Apple stock to trade with a Steve Jobs premium; a variable that the shorts can use as well. Apple stock is always vulnerable to losing Steve Jobs. If Steve Ballmer were to leave Microsoft (MSFT) nobody would care. That doesn’t help the shorts. Steve Jobs is different. A hedge fund could float a factual article that gives statistics on liver transplant patients and it might move the stock.
These seven reasons make Apple an ideal short play for sophisticated traders who want to make money coming and going. The chaos of it all can cause individual investors to become frustrated with the volatility. At www.applerevolution.com I will be tracking the daily rumors that come from the various Apple sites and separating the fact from the fiction. Tracking the tone and volume of articles is a terrific way to distinguish the current direction of this stock’s movement. If Apple won’t respond to the rumors than we’ll have to act as watchdogs ourselves.
Disclosure: Long AAPL