Markets

Apple (AAPL)'s Reaction to News is Just Another Opportunity for Investors

The key to contrarian trading is to understand the difference between a logical market reaction to news and events versus a visceral one. It is, for example, logical that stocks in many small companies in the energy sector are falling drastically. The continued low oil and natural gas prices combined with the turmoil in the high yield debt market makes the risk in investing in such stocks, regardless of how cheap they may look by conventional valuation metrics, enormously risky. The reaction in Apple (AAPL) stock to yesterday’s news, on the other hand, looks to be more visceral than logical.

The news, in case you missed it, came on two fronts. First, two major Wall Street firms, Barclays and Morgan Stanley, both cut their price targets for AAPL. That will nearly always produce a negative reaction in a stock, but the actual changes in outlook were minimal. Morgan Stanley cut their target price from $162 to $143, citing mainly saturation in the smartphone market outside of China for the drop. Barclays cut was even less spectacular, as they dropped the target price from $155 to $150, again based on reduced estimates for iPhone sales. They did, however, keep their overweight rating on the stock.

First, the obvious...I don’t know about you, but the prospect of a stock “only” increasing by 28.8% in the next year, as would be the case if the lower of those two estimates were hit, doesn’t strike me as a reason to sell. Secondly, the fact that there are still significant growth opportunities in China, by definition the largest market for Apple products, could easily offset any slowing of growth elsewhere. Lastly, that is what we are talking about here - a possible slower than expected growth rate, not a real downturn.

The second piece of news, that the CBS CEO Les Moonves said that it appears that Apple is delaying plans for its subscription TV service. This is more significant news if it is true, as some revenue increase from the service is priced into the stock, but for long term investors it is of little consequence. Apple has shown many times in the past that, as with the penetration of the Chinese market mentioned above, they will often delay initiatives until the terms of any venture are advantageous to the company. In this short-term focused corporate environment I find that long term view to be actually quite reassuring, but again I guess that is a matter of opinion.

So, if all that came out was that AAPL may “only” appreciate by nearly 30% in the next twelve months and that Apple is being Apple when it comes to the TV launch, why did the stock trade lower over the last couple of days as the broader market moved upwards? The answer, it seems, lies in trader sentiment. There have been several occasions in the last few months that would indicate that traders are looking for reasons to sell AAPL. Back in October, when Apple announced earnings that beat on the top and bottom line, the stock dropped which, as I pointed out at the time, made no sense. Sure enough, in the ensuing month the stock gained around 15%.

This time around, the same result is the most likely outcome. There is a feeling that Apple is almost too successful, that they cannot continue to grow and beat expectations. That is understandable and at some point has to be true; I mean there is only so much money in the world that Apple can amass. Until there are signs that the company is actually struggling, however, or until an analyst finds a logical, sales based reason to predict an actual fall in the stock, investors should continue to see drops such as we have seen in the last few days as opportunities to buy Apple stock at a discount.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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