Tags: Beware | Apple | Stock

Beware of Apple Stock ‘Mania,’ It Can Quickly Go Sour

Thursday, 16 Feb 2012 10:40 AM

By Jacob Wolinsky

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According to SEC regulations, all hedge funds must report what domestic stocks they own on a quarterly basis.

The SEC gives funds 45 days from the end of the period to file the documents with the SEC. The fourth quarter ends Dec. 31, and hedge funds like to not reveal information so they wait until the last day. Therefore, many funds reported their holdings earlier this week.

What was really shocking was the number of funds which bought Apple stock. Apple was the most widely held stock among hedge funds, according to research by HSBC. After the recent data was release, Apple is an even more “crowded trade.”

Even big hedge fund managers, who tend to shy away from stocks most other funds own, got into the Apple craze.

David Tepper, who made a fortune buying bank stocks in 2010 and normally invests in distressed companies, bought stock in Apple. Almost every large famous investor now owns the company.

What is an individual investor supposed to learn from here? It is important that retails investors not blindly follow great investors into stocks. There are several reasons for this.

Jim Chanos, the legendary short seller, who first called Enron a fraud and called the Chinese bubble gave a presentation about value traps. Value traps are stocks which seem to be cheap but in reality are losing bets. Chanos mentioned that many people will buy into a stock because they see another famous investor did, however, almost every stock has a great investor with significant money invested in the company. Chanos cited this example as a value trap.

Investors should also be cognizant of the amount of money these large hedge funds manage. Some fund managers have billions of dollars to allocate and are very limited in what they can buy. Apple being the largest stock in the world is liquid and allows for a large investment.

Perhaps the most crucial detail retail investors ignore is price. While Apple now trades at a price earnings ratio of around 14, and even less minus its massive cash hoard, the stock is trading at around $500 today. In 13-F fillings, money managers do not have to reveal at what date or price they bought the stock at. Apple reached $370 in October 2011. It is possible that David Tepper bought the stock at a 25% discount to today’s price. Tepper might have even sold it sometime this quarter. Investors won’t know if Tepper sold the stock until May 14, 2012.

While Apple might well be a good investment, small investors must be very cautious before blindly buying a stock because a great investor did.

(The author of this article has no position in Apple.)


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