Will Apple Shares Get A Boost From 'Window Dressing'?

| About: Apple Inc. (AAPL)

Apple Inc. (NASDAQ:AAPL) shares are up 47.2% year-to-date as of 3/23/2012. This makes Apple the sixth best performing stock in the NASDAQ-100 index while it maintains the second highest analysts' rating. Despite institutional ownership of 69.98%, Apple is actually ranked 72 out of 100 in such category. As we approach the last day of the quarter, could Apple shares get an even bigger boost from portfolio managers' seasonal ritual of "window dressing"?

Apple Inc. 1-year Stock Price Chart

Source: Yahoo Finance

Window dressing is the term applied to the activity of predominantly buying in-favor stocks and selling out-of-favor stocks prior to the end of a quarter. Many portfolio managers engage in such activity in order to appeal to potential fund investors as managers disclose their funds' holdings at the end of the quarter; by showing ownership of winning stocks, and non-ownership of losing stocks, a potential investor may find a certain fund more appealing than another for its "apparent" ability to pick winners.

It is estimated that perhaps as much as 90% of price movement in the equity market is driven by institutional trading. As Apple stock is one of the best performing stocks so far this year, it could potentially appreciate further as institutional buyers who have so far resisted its charm succumb to the politics of marketing and the "art of looking smart".

According to Kapitall, Apple shares are the most commonly held shares in the top 10 holdings of the 50 largest mutual funds in the fourth quarter, with 20 of the 50 largest hedge funds holding Apple shares in their top ten lists. One may assume that with such penetration, there is little room for additional institutional ownership. However, the top ten institutional holding Nasdaq-100 stocks all boast institutional holding in excess of 95%, as opposed to Apple's 69.98%. So after all, maybe there is additional room for Apple shares in the top 10 holdings for the other 30 largest hedge funds.

In order to determine whether window dressing will have any impact on Apple shares during the next few days, we examined the performance of Apple stock during the last five business days prior to the end of the quarter for the past five years.

Apple Stock Price Change
Last 5 Trading Days of the Quarter 2007-2011
Q1 Q2 Q3 Q4 Average
2011 1.03% 1.34% -5.68% 1.62% -0.42%
2010 2.45% -7.17% -1.79% -0.32% -1.71%
2009 -1.30% 6.66% 0.08% 4.27% 2.43%
2008 2.85% -3.30% -10.39% -1.19% -3.01%
2007 -0.65% -0.78% 6.47% 2.52% 1.89%
Average 0.88% -0.65% -2.26% 1.38% -0.17%
Calculations were derived from data provided by Yahoo Finance

It is interesting to note that when all quarters are taken into consideration for the past five years, Apple shares actually dropped by an average of 0.17% during the window dressing period (last five business days of the quarter). However, it should be noted that during the first quarter, there was an actual average increase of 0.88%, while during the past two years, such increase averaged an even higher 1.74% during the first quarter. Meanwhile, the worst performance was actually during the volatile third quarter, where there was an average drop of about 2.26%.

Given such results, and as we are currently in the first quarter of the year, it seems there is indeed a good possibility that Apple shares will benefit from window dressing, although past performance is no indication for future performance.

In addition, with earning expectations of $43.90/share for the current fiscal year, and $49.61/share for next fiscal year, Apple's forward P/E ratio of 13.58 and 12.01 respectively are rather attractive, and this could prove to be a good opportunity to purchase Apple shares before the window dressing effect goes into full swing.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.