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With Apple Stock Falling, Be Sure You Do This (Nasdaq: AAPL)

If Sir Isaac Newton were alive today he wouldn't have to sit under a tree to get knocked senseless by an errant fruit – with Apple stock falling, rising, then falling again, just being an Apple investor would do the trick.

Apple Inc. (Nasdaq: AAPL) stock started the year at $411, itself a 27% increase over the course of 2011. The stock rocketed to $626 in April, fell to $530 in May before zooming up to $702 in September.

And then it really got crazy.

Apple stock started falling, taking a rocky slide down to an intraday low of $505 on Nov. 16. Two weeks later, AAPL was back over $590 and threatening to cross the $600 threshold.

Until this week, when Apple stock went falling yet again. On Tuesday AAPL dropped $10 a share (about 1.7%), then Wednesday nosedived another $37.05, or 6.4%, to close at $538.79.

Apple stock today (Thursday) opened in negative territory, slipping quickly down to $518.63. Then it suddenly reversed sharply upward, reaching $550 by noon.

Analysts were left scratching their heads.

"Apple stock is significantly more volatile than its earnings and innovation stream," Daniel Ernst, analyst with Hudson Square Research, told Reuters. "And yet the wind blows slightly from the south instead of the east one particular morning, and the stock is down 6%."

"It makes no sense. There are lines around the block for their products all around the world," Ernst added. "No other company has that."

Why Apple Stock is Falling

Theories abound as to why Apple stock is falling.

This week's move most likely was triggered when AAPL stock made a "death cross" – that is, the 50-day moving average dropped below the 200-day moving average, typically a bad sign for a stock.

But there are a few other factors that could have turned off investors:

  • No Special Dividend: Unlike many other cash-rich companies, Apple has elected not to issue a special dividend to shareholders before the end of 2012. "As soon as funds became convinced that (Apple CEO) Tim Cook wasn't going to participate (in the special dividends), they began transitioning out of Apple for the short run," wrote Apple analyst Jason Schwartz of Economic Timing in a note to subscribers.
  • Negative News: It's always something. Research firm IDC put out a report this week projecting Apple's market share in tablets to slip from 56.3%to 53.8% for 2012. Rumors out of Asia said Apple had reduced component orders by 20%. On the other hand, the pie keeps getting bigger: IDC said the overall tablet market will grow from 68.7 million in 2011 to 122 million units in 2012 and 283 million by 2016. And reduced components for Apple's post-holiday quarter make sense, as sales always drop in the slower March quarter.
  • President Obama Re-elected: The re-election of the president means capital gains taxes will probably rise in 2013 from 15% to 20%, with an extra 3.8% Obamacare surtax for individuals making more than $200,000. Both large and small investors with long positions in AAPL have a strong incentive to take profits before the end of the year.

Why Nasdaq: AAPL Keeps Bouncing Back

The only problem with the many explanations we hear whenever Apple stock is falling is that it promptly reverses course, often dramatically. If AAPL is such an obvious sell, why would the stock keep going back up?

The answer is that Apple's fundamentals have remained solid, and only look more attractive after a big selloff. Investors eager to buy AAPL see a 10% or 20% drop as a buying opportunity.

Consider these facts: Apple's P/E is 12.38, well below its historic average of about 15, and its forward P/E is about 10.

The company's cash hoard is up to $121.3 billion (with no debt), equal to about $129 a share.

Apple Stock Price History
(Nasdaq: AAPL)

And the yield is up to 1.8%. In fact, the mere presence of a dividend — and one that should rise, given the company's low payout ratio of 24% — helps keep a rubbery floor under Apple stock.

Finally, Apple continues to make outlandish sums of money. With a full slate of new products introduced this fall, including the iPhone 5 and the iPad Mini, the December quarter could set another record for revenue and profits.

Apple may well falter at some point in the future, but there's little evidence yet that its glory days have ended. Until then, Apple stock will keep bobbing back up every time it falls, just like a beach ball submerged in a swimming pool.

Still, the extraordinary volatility that has plagued AAPL in recent months won't subside until after the first of the year. By then many of the tax-related issues pressuring the stock will no longer exist.

For investors, the plan is simple: do nothing for now.

That's right. Those who own Apple stock should hang on to it at this point, waiting out the storm. By the same token, investors should hold back on putting any new money into AAPL until January, when things will settle down.

Despite all the negative talk and some dire predictions for Apple stock falling below $500 or even $400, the stock should move significantly higher through 2013.

Research firm Trefis today reaffirmed its $712 price target on AAPL in the wake of the stock's wild ride.

Likewise, Piper Jaffray analyst Gene Munster hasn't budged on his target for Apple of $900 a share.

"The demand for iPhone, the demand for Apple products continues to be exceptionally high," Munster told CNBC on Wednesday. "People want their products, and we think that that's ultimately going to drive the stock higher."

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Join the conversation. Click here to jump to comments…

  1. Wayne Waters | December 7, 2012

    An incredible Company..

  2. Steve Floyd | December 29, 2012

    I have revered and respected Apple's approach to their products since I was about 6-7. Something tells me we are going to keep hearing from this little upstart from Cupertino, CA for years to come.

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