Apple (AAPL): The psychology of trading the stock

Posted Aug 19th 2007 9:10AM by Georges Yared
Filed under: Forecasts, Apple Inc (AAPL), Interviews, iPhone, S and P 500

Apple Inc. (NASDAQ: AAPL) closed at $122.06 on Friday. The stock has come down from its 52-week high of $148.92, or a full $26. The interesting thing I find about Apple comes from talking to eleven different professional portfolio managers who I worked with these past 16 years.

To the person, all eleven portfolio managers had nothing but glowing things to say about Apple. The stock has been a home run this past year as it has basically doubled from the mid $60s to the current $122. The eleven managers expect the fiscal 4th quarter ending September 30 to be excellent and forward guidance to be solid and comforting. But, these managers have recently been net sellers of the name. Collectively they have sold between one third to one half of their positions. Why?

When the markets come down in a powerful fashion as it has these past couple of weeks, the first thing a portfolio manager does is "protect profits." I heard this in seven of the eleven conversations. I have a double in this stock, they say, capture the gain now, and re-evaluate it later. Yes, iPhone, iPod, and the new Mac are doing great. Yes, the retail store system is the envy of ... well, retailers. The story is superb and the numbers are locked and loaded. Yet, these guys have been sellers.

In tough times, portfolio managers try to protect two things: a portfolio's total performance and their annual bonuses. Most managers are measured against the S&P 500 for their bonus schemes. If you have a stock that has way outperformed the S&P 500 and it's getting late in the year, grab the profit and book the gain.

I love Apple's business model and its near- and long-term prospects, they say, but my compensation is not based on the calender year performance of the stock.

I asked all eleven managers when would they stop selling a portion of their Apple position and start rebuying the stock? Nine of them said as soon as the market is stabilized and the "normalcy" returns.

So there you have it: they love the name but are protecting their respective portfolios performance and their annual bonuses! So much for the excellent fundamentals!

Georges Yared is the CIO of Yared Investment Research and the author of Stop Losing Money Today.

Tags: AAPL, Apple, iPhone, iPod, Mac, portfolio managers, protecting profits, S and P 500

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Reader Comments (Page 1 of 1)

8-19-2007 @ 9:48AM

starsecurities said...

I too was concerned about the shares of Apple that i held during this market loss and should i sell or hold. We all know that Apple has a strong future and that the stock has a way to go in appreciation but that does nothing for the moment when you see the fear play out in the market and that Apple along with the other big boy stocks going down dollars a day. I made the decision to sell and grab what profits i made so far and to get back into Apple after the market settles down. From what you have said i did the right thing.

8-19-2007 @ 4:32PM

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8-19-2007 @ 4:56PM

MartinE said...

There is also the general move into cash by portfolios during times like this to consider. I suspect we'll see Apple start moving back up when people start to understand what the heck just happened. Apple does not require liquid debt markets for its business- it designs and markets, everything else is outsourced and they have a pile of cash.

8-19-2007 @ 5:18PM

bill said...

There is nothing more soothing than a Georges Jared analysis. His comments indicate that those of us who are not working in the trade and do not expect bonuses, must make our own judgments when it comes time to sell or hold.As for me, I find it better to hold and not worry about when to jump back in. It is the faith in the company, its management and its history that govern my moves, not a temporary removal of some checkers from the board so I can click them in my hand as in a gambling hall.

8-20-2007 @ 1:18AM

Steven James said...

I would Add CROX to the list of Big Winners who were liquidated and oversold. I think the bounce back Friday was telling. CROX rose CROX +7.91% while AAPL rose AAPL +4.28%. I know you love both stocks however I think the smaller CROX which fell much harder from $61.25 to $44.10 at the bottom, has a much faster rise to run, to your ultimate price of $71