This week has been all about the Twitter (TWTR) IPO in the world of finance. If you find yourself a little bemused by all the fuss about a company that doesn’t make anything tangible and has never made money, the chances are you are over 50 and view the whole thing as massive hype. Remember, though, that the stock market is, at heart, a forward discounting mechanism, essentially driven by expectations rather than actual results.
Sometimes these expectations get out of hand. Such was the case with Apple (AAPL) in September of last year. I pointed that out at the time, and have remained somewhat skeptical ever since. The burden of expectations seemed to me to be way too high. Apple was making phenomenal amounts of money and continuing to grow, but the Steve Jobs inspired style of making everything an “event” meant that even solid performance risked being seen as disappointing.
When the new iPhones were introduced last month, that tendency was definitely evident. The buzz before the launch about a bigger screen or a substantially cheaper phone for the Chinese market meant that when the new products were unveiled the market was almost inevitably disappointed. I was guilty of the same thing, and expected the stock to continue to underperform until something truly revolutionary was unveiled.
While many have told me that it is not an advisable thing for a pundit to do, I still maintain that good traders and investors must be able to accept that a good percentage of calls they make will be incorrect and be able to recognize when that is the case. With that in mind, I have to say that, last month, I was wrong in two ways.
Firstly, the stock did not underperform the market.
At first, the market’s reaction was negative, but overall, since the day before the event, AAPL is up 5.3% versus a 5.1% gain in the S&P 500; not spectacular, but not underperformance either.
Secondly, and more importantly, I fell into exactly the trap that I described last year, only in reverse. Back when AAPL was around $700 everybody focused on the good in any news and ignored the dangers. Last month most people (including me) focused only on the bad… no bigger screen, no watch, no agreement with China Mobile, just pretty colors.
There were some changes to the insides, but no groundbreaking new product or announcement. In my defense I will say that I write about markets, not computers. I make no claim to be a tech genius, but I have made a living out of financial markets for long enough to understand that, as I said above, expectations and perceptions often matter more than reality. On that basis, my analysis was correct in the short term, but now that reaction has died down and AAPL is out of the headlines, what do we have?
Well, it turns out that those “changes to the insides” could (as clearly explained in this Businessweek article by Sam Grobart) herald those significant innovations that investors were looking for. He may or may not be right. Even if he is right, continuing to tweak existing products isn’t going to set the world on fire. My interest in AAPL, however, stems from the fact that reality is beginning to intrude on the sentiment driven vacillations of Apple’s stock, and on that basis, gradual improvement to an established product may not be a bad thing.
Just as the “irrational exuberance” in the run up to $700 disappeared, so will the “Apple can’t do anything right” mentality. When all of the noise abates, we are left with one of the biggest companies in the world that makes huge amounts of money, continues to grow, and is available at a forward P/E of around 12, a significant discount to the broad market.
Without the distortions of expectations, AAPL screams “BUY ME!”
From a technical perspective, the small declines in AAPL over the last two days leave the stock at a decent level to buy.
Yesterday’s close of 520.92 is right at the 20 day moving average, and, while that will matter little in the long term, it could well limit the downside over the next few days. AAPL has spent most of this year in an approximate $400-$500 range, so now it has broken out that $500 level will probably provide more support in the longer term.
My experience in trading rooms has taught me never to underestimate the power of a prevailing sentiment or conventional wisdom, but in a world where it seems everything must be expressed in under 140 characters, those things can shift quickly. Sentiment regarding AAPL seems to be shifting toward neutral and if that is the case, then the stock should be looked at in terms of fundamentals. From that perspective, 12 times earnings looks cheap.