By Scott Rubin
When examining the investment merits of Apple (NASDAQ:AAPL), it is not hard to see why the company has become the darling of Wall Street. Everyone is making money in this name.
Furthermore, it looks like this story is far from over. Everything continues to line up for the stock and it looks like AAPL could hit the $600 mark in short order.
First, let us take a look at the fundamentals. Even as AAPL becomes more expensive on an absolute basis, the stock is actually getting cheaper on a valuation basis.
Basically, the Street is not pricing in the company's extraordinary earnings growth fast enough. By the time the share price catches up with the previous quarter's blowout results, AAPL has raised the quarterly earnings bar once again. This is a very unique situation. APPL's earnings momentum is just astounding.
Due to the uniqueness of the situation - never has the investing world seen such a large company showing this type of growth trajectory - the stock's valuation appears almost laughably low. Shares trade at a trailing P/E of 14.91, a forward P/E of 11.04 and a PEG ratio of 0.63 as of midday Monday.
This low valuation is not fully pricing in AAPL's likely future growth trajectory and reflects continued market caution about the idea of a "growth stock" with a market cap of nearly $500 billion.
The fact that the company now has around $100 billion in cash just sitting on its balance sheet earning next to nothing also is acting as a bit of an overhang on the stock's valuation.
Nevertheless, everyone owns AAPL and everyone is still enjoying the ride. This leads to the current technical outlook for the shares. APPL has broken out of a consolidation range between $350 and roughly $400, which can be traced back to the summer of 2011.
During this period, the stock displayed a number of failed breakouts testing the area above $400. At the beginning of January, however, APPL exploded out of this base and has been moving aggressively higher ever since.
From a technical perspective, the time to get bullish on AAPL was in early January when it rose above its previous range. The rally that began on this breakout is still very much alive with AAPL trading near its all-time high midday Monday at $524.78.
Not only do the fundamentals and technicals line up in AAPL, but the company's product cycle is also hitting on all cylinders. Consumer expectations for iPhone 5 and iPad 3 are high in the wake of massively successful launches for iPhone 4S and iPad 2. In addition, rumors surrounding the company's possible development of a revolutionary iTV are creating significant buzz.
While the fundamentals, technicals, and company product cycle are all pointing to higher prices for AAPL shares, the trade has become incredibly crowded. This could be a cause for concern.
Irrespective of what is going on at the company, AAPL's future share price is going to be determined by supply/demand dynamics in APPL shares. If there are more buyers than sellers, the price will go up. If there are more sellers than buyers, the price will go down.
While the consensus outlook for the stock is still quite bullish, the fact remains that there is a considerable amount of potential firepower on the sell-side if the market gets spooked - Wall Street has built up some massive positions in this stock.
In fact, one out of every five hedge funds has APPL as one of its top 10 holdings. If the consensus opinion regarding AAPL were to shift, or if new buyers simply don't step in, and the Street starts selling, the share price could drop considerably in a short amount of time.
Let us take a look at who some of these big potential sellers are. Using data taken from the 2011 year-end 13F filing period, we can determine the largest AAPL holders.
Going into 2012, the largest holder in the world was the Fidelity family of mutual funds, which had a $19.6 billion stake in the company. BlackRock's (NYSE:BLK) mutual funds and ETFs were the second largest shareholders with a $17.7 billion position. Most of the other top holders form a "who's who" list of the world's top mutual funds.
Also, top investment banks such as JP Morgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), and Goldman Sachs (NYSE:GS) have outsized positions. These three firms held $4.7 billion, $2.8 billion and $2.5 billion in stock, respectively.
The real group to keep an eye on, however, is likely hedge funds. Despite their relatively smaller positions, these funds are known for having quick trigger fingers and will be among the first to head for the exits on any sign of trouble.
The hedge fund with the largest position in AAPL at the end of 2011 was Chicago-based Citadel Investment Group. Ken Griffin's firm owned 2.6 million AAPL shares valued at $928.1 million.
Next up is Discovery Management, which had a stake valued at $837.8 million. Stephen Mandel's Lone Pine Capital was riding the AAPL train with a sizable $785.3 million position and the famed Tiger Management hedge fund had a $646.2 million stake.
The list of all-stars just goes on and on. Names like Greenlight, Blue Ridge, Viking Global and Renaissance Technologies all rank high on the major AAPL holders list. If you are familiar with the hedge fund world, then you know that these are among the most successful investors in the world.
Of course, this is a good thing if you are an AAPL shareholder. After all, don't you want to invest alongside David Einhorn and Greenlight Capital? Of course you do.
It is important to remember, however, that if the outlook for the little outfit that Steve Jobs built ever changes, these hedge funds will surely get the jump on the average shareholder. Make no mistake, the AAPL waters are filled with sharks - while everyone is swimming in the same direction for now, when these big boys decide it is time to get out, they are sure to cause some major waves.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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