During the month of March, analyst price targets for Apple continue to head higher, as the stock soars through previous targets. The latest price target hike comes from Morgan Stanley, raising its target to $720 from $515. In addition, Morgan Stanley's analyst noted that Apple could climb to $960 over the next 12 months. The highest price target is FBN Securities' $730, followed by Morgan Stanley, and then Barclays Capital at $710. Goldman Sachs (GS) also recently raised its price target from $600 to $660.
Apple's stock has, without a doubt, been on an unbelievable ride higher. In fact, Apple's 48% rise from its 2011 close of $405 to $600 accounts for more than one-third of the Nasdaq's (QQQ) gains this year. If Apple keeps up its dominating ways as compared to the rest of the stock market, a future round of the Fed's quantitative easing might have to focus on just buying Apple's stock, in order to make sure the major indices as a whole remain higher.
With the stock already rising 48% this year, should you be jumping in with both feet at the behest of analysts? Or, are the analysts simply trying to help their firms generate buying interest so the firm can offload its shares to clients? Since February 15's huge intraday reversal, which sent Apple's stock from $526.29 down to $496.89, there have been a few other instances of unusually large intraday moves lower in relatively short periods of time. This week alone, there were two such instances. On Wednesday, the stock dropped $19.32, or 3.25%, in less than an hour, far in excess of the less than 1% drop in the Dow Jones Industrial Average (DIA), S&P 500 (SPY) and Nasdaq during that time. On Thursday, Apple's intraday pullback was 2.65% from its $600.01 all-time high during the first 45 minutes of trading. Why does this matter?
The recent sharp intraday moves lower on higher than average volume are indicating that somebody with the resources to move a half trillion dollar market cap company is distributing this stock. Perhaps you believe the shenanigans described by former Goldman Sachs employee, Greg Smith, in his recent The New York Times op-ed, is widespread on Wall Street, and firms are indeed using their analyst upgrades as an opportunity to sell. Or, perhaps after a 48% rise in less than three months, some hedge funds will take some profits. The reason itself for the sharp intraday reversals isn't all that important in the grand scheme of things. However, the reversals themselves are important, as they indicate someone is choosing certain moments to dump a bunch of shares, and there isn't enough buying pressure to pick up the slack for that seller. In other words, a firm (or perhaps a few firms) with the ability to move a half trillion dollar market cap stock choosing to sell part of its position (or enter a short position) is something investors should take note of. It might indicate that a near term top in the stock is on the horizon.
Given that Apple is the most widely owned stock in the hedge fund community and that we now have largely made it through yet another round of analyst price target hikes, new money entering the stock should do so with caution. I know the P/E is low compared to its growth rate, and I know the company has all sorts of wonderful products planned for the future. The company is doing fabulous. However, given that the stock has gone up over the past few months without any significant pause on a chart tracking daily movements, along with the recent sharp intraday moves lower (being masked by the daily moves higher), patience and caution is in order for the investor with new money to put to work. If you normally enter a position all at once or in halves, instead break your position up into fourths or fifths, entering the stock more cautiously.
For current Apple investors, there is not yet any strong reason to sell. If you are thinking about hedging your positions and are interested in an idea beyond the typical buying puts or selling covered calls in Apple, you could look to short or buy puts on the Nasdaq 100. Apple's weighting in the QQQ is currently 18.44%. Any move lower in Apple's stock will likely drag QQQ with it. It's not a perfect hedge, but something to think through as you decide what type of delta you are looking for as a hedge to your equity position.
Apple is the dominating force of its industry, and there are not yet any signs of that changing. However, stocks can often behave very differently from how investors would expect given the underlying fundamentals of a company. With the stock currently trading around $600, exercise caution when putting new money to work and consider a hedging mechanism to protect some of your profits.