Apple 2.0

Covering the business that Steve Jobs built

Riding the AAPL slingshot

October 15, 2011: 7:35 AM ET

Apple, as hedge fund managers are well aware, is one stock that always bounces back

It's hard not to be cynical about Wall Street when you see a chart like the one at right, which traces Apple's (AAPL) share price over the past four weeks.

It not terribly surprising that the stock has shot up nearly 20% in the past two weeks to close at an all-time high Friday of $422. The iPhone 4S is selling briskly and the company is expected to report record earnings on Tuesday.

What's harder to rationalize is why it fell more than 16% in the two weeks before that to hit an intraday low of $354.24 -- the day the iPhone 4S was unveiled and the day before Steve Jobs died.

I'm reminded in times like these of Jason Schwarz's Apple: Seven Reasons Shorts Love It, first published in 2009. The meat of it can be boiled down to two sentences:

"If you can keep a good stock down then you are able to load up for the ride back up. It's like a slingshot -- the harder you pull, the more propulsion you generate."

Schwarz, who publishes a popular investment newsletter, is no Zuccotti Park protestor. He's a Wall Street insider who knows something about how the game is played.

You can read the full text of his thesis here. If you don't want to click through The Street's version -- posted in seven slow-loading gallery pages -- you can read, below the fold, the executive summary we published in 2009. Except for some of the pre-iPad details and the last point, about Steve Jobs, it rings as true today as it did two years ago.

  1. Apple is the market leader. This one stock has become so important to the market that its action is contagious. This influence makes Apple a prized possession for both the longs and the shorts. Knocking down an easier target like Research In Motion (RIMM) or Citigroup (C) doesn't generate the same snowball effect.
  2. Apple always bounces back. Over the long run, Apple fundamentals will certainly take the stock higher, but hedge funds want to maximize the ride. Keeping a great stock down allows them to profit from quick predetermined trades rather than being fully invested all the time.
  3. The predictability of Apple reduces a short's risk. Everyone knows when the next iPod, iPhone,and iMac refreshes will hit. This has turned into a calendar-driven catalyst stock. During the quiet time, the stock is vulnerable.
  4. New media have changed the game. Anybody can say anything and the masses will believe it. The topic of Apple currently dominates this new media. There is no accountability or verification of sources like the old days. In such an environment, hidden agendas can be pushed endlessly without disclosure.
  5. Apple secrecy. As the unparalleled leader in tech innovation, Apple feels that it is necessary to keep future products veiled to all competitors, consumers and investors ... Apple has yet to sell a single Tablet, yet hedge funds already have made millions from rumors surrounding the product. The lack of transparency from Apple creates a perfect storm for short-term traders.
  6. Apple innovation. This company is so good that it causes imaginations to run wild. A hedge fund could float a story that Apple is thinking of buying Saturn in order to develop a new brand of Apple cars and people would go nuts ... The constant innovation coming out of Apple provides traders with endless material for believable speculation.
  7. Steve Jobs is the visionary of the century. This one man is the single greatest asset in corporate America, which causes Apple stock to trade with a Steve Jobs premium, a variable that the shorts can use as well. Apple's stock is always vulnerable to losing Jobs.
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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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