It's almost axiomatic that big moves in stock prices can usually be traced to major players such as hedge funds shifting their positions around -- usually in the name of profit-taking. Now don't get us wrong; making a profit means that you do indeed take your profits, and that is what investing is all about. Whether short term or long term or day trading is your game, at some point you stop and take your profits.
That point where you stop is typically a point when a stock looks to have reached a certain peak that it likely won't move beyond until something new happens. For a number of major hedge funds -- most if not all of whom had gotten on the Apple ride up the charts to $705 at prices as low as $300 -- clearly believed Apple would need to up its innovation game and not simply rely on existing technology and services to take it further. Hence, it was time to sell off very large positions in order to lock in the profits. To the elite players in the game, business is business and it was time to move.
The problem, of course, is that when the few elite players move very large positions, the small players (and we don't mean here simply individual investors with very modest share numbers, we mean anyone who is not one of the few elite players) have to follow suit. That is the reason why a company that set an all-time United States record for most profit earned in a single quarter ended up tumbling from $705 to $450.
The hedge funds have many other places to invest that money where they can easily see a doubling or tripling of their investments. Once you hit $705, the odds that it will triple to $2,115 are, well monumental - it isn't going to happen. Meanwhile, if Apple begins to demonstrate renewed innovation capability the hedge funds will quickly jump in again at today's much lower prices (as we write the stock is at $466.58), a much more favorable scenario than having held on to the stock. So much for the 25,000 foot view.
According to a Reuters article that appeared today, Leon Cooperman, Thomas Steyer and Barry Rosenstein -- elite players all -- unloaded billions of dollars of Apple shares between September 30 and December 31, 2012, according to disclosure documents filed today. Cooperman's Omega Advisors fund dumped its entire stake of more than 266,000 shares in Q4 2012. Steyer's Farallon Capital sold 137,000 shares. And Rosenstein's Jana Partners sold off its entire Apple stake of more than 143,000 shares.
The Reuters article reminds us that the large hedge funds must disclose their U.S. stock holdings within 45 days after the end of any given quarter -- hence the ability to see what shaped Apple's stock price as it rode the wave up and then came back down. That wave that took the stock to $705 and then crested looks to us to have crested on the major hedge funds' collective perception of Apple's ability to deliver on innovation or, more accurately, their perceptions that Apple had no more immediate innovations in hand. In truth they were right.
As we've now noted numerous times, Apple has had a long run of coasting without innovating. That Apple continues to deliver products of enormously high build standards around its incremental software improvements of the last 12 to 18 months has kept Apple moving forward but innovation momentum has cleared slowed. For the big hedge funds they merely did what they had to do in the wake of this reality; it was time to sell off and lock in the huge profits.
These same hedge funds are now waiting to see if Apple will deliver real innovation. They understand that any profits that will continue to accrue through developing an inexpensive iPhone or a tweaked up iPhone 5S will add to the Apple cash stash and cause issues with other players, such as David Einhorn. But it won't change the stock's price. Only major new innovation can achieve that.
Before we know it, July 2013 will begin to get closer and closer, and Apple's World Wide Developers' Conference will be looming. We anticipate a new "raise the bar" level of Apple innovation then. Meanwhile it will be worth keeping an eye on how the major hedge funds play the game between now and then.
Edited by Rich Steeves