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Monday, December 10, 2012

The mystery of Apple’s crashing stock price

“It is not unusual for investors to find the markets moving in ways that seem to defy common sense. Companies often feel the same way. They announce good results, they have a great product pipeline and plenty of cash in the bank, and the stock price falls off a cliff. The directors throw up their hands and wonder what on earth the markets expect from them,” Anthony Harrington writes for Seeking Alpha.

“However, what looks to be irrational or at best understandable as a wild amplification of a minor negative — something markets can do from time to time as investors overreact and ‘herd behavior’ sets in — can occasionally have a more rational explanation,” Harrington writes. “Apple (AAPL) provides an excellent case in point. The stock has a long history of soaring rallies and massive sell-offs. Why is this important? As arguably the most successful and iconic company in America, and as a company that has a reputation for rewarding buy-and-hold investors if they can ride out its price troughs, Apple is a major component in the portfolios of big institutional funds across advanced markets. Fund managers know that by maximizing their allocation to Apple, they are giving themselves a very good chance of outperforming over the medium term.”

Harrington writes, “In an excellent article featured in Seeking Alpha, Jason Schwarz points out that the key to understanding Apple’s huge sell-offs from time to time lies in the fact that most fund managers will have a rule that says that any single stock cannot be more than a certain percent of their total portfolio. The reason for this is to honor the idea of diversification as the best way of protecting capital. If you follow this idea of a restriction on the percentage any one stock can have allocated to it, then it follows that when Apple is doing one of its major run-ups, adding very substantially to its price, as happened when it went from $500 to $700, the total value of Apple holdings in many fund portfolios rapidly exceeded the allowed allocation. So the fund managers have to rebalance their portfolios by selling off a chunk of Apple stock to bring the allocation to Apple back within their policy constraints.”

Read more in the full article – recommended – here.

MacDailyNews Take: You can define “crashing” however you’d like, but while Apple is certainly down from its September 21st all-time high of $705.07, one year ago, on December 9, 2012, AAPL shares closed at $393.62.

[Thanks to MacDailyNews Reader "Arline M." for the heads up.]

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