Why is Apple's share price so volatile?

As mentioned on the first page, the following information hasn't been updated since 2014 but may still be useful to anyone seeking to find out what goes on behind the scenes with Apple's shares.

In many instances there is absolutely no connection between the actual economic value of a business and its stock price, and in the case of Apple this is certainly true. Apple is actually criticized for having too much money in the bank. In some ways its success has made it the target of much criticism.

Regarding the amount of money Apple has in the bank, tempers are raging over this. In 2013 a 'rogue' fund manager, David Einhorn, caused quite a stir when he claimed that Apple was trying to stop shareholder having a say in what it did with its money. As a result the company eventually agreed to return more of its $144.7 billion cash horde to investors. Doing so is no easy process because a lot of that cash is tied up overseas and the company will have to pay corporation tax if it returns it to the US (Apple's been in quite a lot of trouble recently over its tax practices). To avoid tax on this occasion Apple offered investors the chance to lend it money so that it can pay current investors back (at least that's one way of looking at it). Suffice to say Apple is getting a better rate of interest on this debt than it would have to pay the US government in tax. The bond sale happened in April 2013.

This is the sort of news that should please investors, and following the bond sale initially the stock increased in value, but then it fell back on the 15 May. Why would that be? The following story is a good example of why it's the big fund managers who really control Apple's stock. There have been lots of examples of aggressive trading on AAPL, but in this case it appears that short-sellers had swarmed AAPL.

This "swarming" was identified by Canadian money manager and financial columnist Mal Spooner. He first noticed that short interest in Apple had swelled from 8 million shares in April 2012 to 20 million in April 2013 and likened this burst of short selling to a "swarming," a street crime where "an unsuspecting innocent bystander is attacked by several culprits at once."

Spooner highlighted that short interest in Apple also peaked between 15 April and 30 April 2013, to a record 41.6 million shares. During that fortnight - on 19 April (two trading days before Apple's second quarter financial report) Apple's share price hit its lowest price in 16 months ($385.10). Those investors then made off with their gains because by 15 May (there's that date), Apple's short interest had fallen to 26 million shares. More here on Fortune.

Spooner explains: "The irony is that short-sellers borrow the stock from real shareholders (via third parties) in order to sell it on the market. After the selling pressure wreaks havoc on the stock price, the short-seller then buys shares at a much lower price, returns the ‘borrowed’ shares to those real shareholders and keeps the profits."

Whether you understand all this doesn't matter as much as knowing that this is the kind of thing that goes on with Apple's stock.

Another example of how big funds can control the AAPL stock. In 2012 Apple saw massive declines when four of the biggest hedge funds dumped billions of dollars of Apple stock. The share price plummeted and no doubt a number of investors panicked.

Why did these big investors pull out? They could have us believe that they had lost confidence in Apple. Or perhaps these funds pushed billions of dollars into Apple in the Summer of 2012 and then pulled out months later when they had made sufficient short term gains.

You should always be aware that these big funds can rip money out of AAPL at any time. For example, on one Friday in January 2013 we saw what was described as a "premeditated unloading of some 800K shares (some $350 million worth) of AAPL in the last second, with the full knowledge it would shake the market."

Other suspicious AAPL activity on the NASDAQ earlier in January 2013 had coincided with the expiration of call options written the previous summer, and the Apple share price closed at exactly $500 that day. Coincidence?

How can you stay clear of being a victim of these big bullies? Mal Spooner's advice:

  • Avoid owning stocks that have become darlings. When it seems nothing at all can go wrong, it will, and when it does there’s sure to be a swarming.
  • If there’s evidence of a growing short interest in a company, best not own the stock.
  • Instruct your financial institution that your shares are not to be available for securities lending purposes.

Apple did indeed become the stock market darling in 2012. Beware that while this may happen again, it isn't something you as an individual investor will have any control over.

Who owns shares in Apple?

According to a Fortune report, the most popular investment of billionaire investors is Apple. Fortune's chart show the top ten holdings of 21 billionaire investors, including Warren Buffett, George Soros and Carl Icahn. Top of the list is Apple, followed by Wells Fargo, AIG, Yahoo and Coca Cola. The only other IT company to figure is IBM in tenth place.

Some might suggest that if these expert investors own Apple shares there must be something in it.

The highs and lows of AAPL stock

No doubt, many of the new AAPL investors in 2012 decided to invest money in the company after reading reports that suggested that Apple's stock was set to climb all the way to $1,000 a share based on the success of the iPhone and iPad, while those who invested in 2013 were likely enticed by claims that Apple is working on new product categories including smart watches and television.

Over the past year or so the iPhone has continued to be popular, as has the iPad, but Apple has been criticized for failing to grow market share – particularly in the smartphone market. The issue is that in many countries smartphone ownership is at saturation point, while in emerging economies smartphone ownership is on the rise, but the iPhone is too expensive for these markets. Indeed, even in the UK there is a market of new smartphone adopters who are turning to cheaper Android devices because Apple doesn't offer a cheaper iPhone.

There is much debate to be had over whether Apple should be chasing marketshare with low cost devices, or focusing on selling higher priced products with bigger margins to fewer people. iPhone users are said to be worth four times more than an Android user because iPhone users spend more money online and on apps than Android users. Android phones have been described as "dumbphones" because users don't do anything financial with them. When it comes to deciding which platform to invest in third-party companies go where the money is. Sometimes less is more, after all.

That seems unlikely to change. Apple is a company that has always focused on quality products sold for higher prices, rather than marketshare, so it seems misguided to expect anything else from it. Not every Apple investor thinks that  Apple should grow marketshare at the expense of profit. 

Those who have concluded that there is no room for increased smartphone market share have looked to rumours that Apple will make a television or a smartwatch with hope that these new product categories could push up Apple's share price. It's impossible to make predictions about the success or failure of products that Apple hasn't even launched yet. Those markets are certainly ripe for innovation, but that doesn't mean that Apple will see the same success as it did when it launched the iPod, iPhone or the iPad.

Recently (on 20 February 2014) Barclays analyst Ben Reitzes downgraded Apple suggesting that the stock won't see any huge leaps and bounds any time soon.  Reitzes wrote in a note to clients: "Frankly, we just couldn’t quite bring ourselves to use smart watches or TVs as reasons to raise numbers – nor were we fully convinced that these products could move the needle like new categories did in the old days. As a result, we believe it is time to step aside, given a maturing smart phone market."

Similarly coverage of the decline in the value of AAPL shares will have given investors cause for concern. The ups and downs of Apple's share price over the past year will have given investors cause for concern and as a result many will have cut their losses and withdrawn their investments.

At the same time, a selection of high profile investors have make waves, buying billions of dollars of Apple stock and making demands of Tim Cook for bigger returns on their investments. At the heart of these demands is the fact that Apple is sitting on a massive cash hoard of around $150 billion (much of which is offshore so the company can't actually spend it without paying a fortune to repatriate it – more on this below).

Apple has been making some moves to appease investors, for example, every quarter it issues a dividend to investors (for example, on 13 February 2014 it paid investors $3.05 per share). This is part of a scheme to repurchase Apple stock, and the recent stock buyback saw Apple repurchase $14 billion of its stock (in comparison, in the December and September quarters combined, Apple repurchased 'just' $10 billion of its stock).

One of these high profile investors is Carl Icahn, who has about $4 billion invested in Apple. Described as an "activist investor," Icahn has had a number of meetings with Apple CEO Tim Cook in recent months, and has made various demands, including that Apple boosts its stock repurchases to $50 billion. These meetings have been behind closed doors and Icahn has revealed nothing, but he has now withdrawn this demands. Some think that Cook has been able to reassure Icahn, others that Icahn is manipulating Apple and positioning himself as an ally.

Either way, Apple's stock buybacks dividend payments have gone some way to appease investors while they await the launch of Apple's next big thing.

The best advice is to invest for the medium to long term – five to ten years – and expect the value of the shares to fluctuate. If you invest over a longer period you’re in a much better position to ride out any fluctuations in the market.

In the short term investment in Apple is a sophisticated game, with many people (many of them fund managers) with huge resources putting their money in. Just remember, you're up against the big boys and girls.

Make sure you stay informed, create a short cut to Yahoo Finance.

Follow Karen Haslam on Twitter / Follow MacworldUK on Twitter


Mass AAPL sell off by four hedge funds caused Apple share price to fall

AAPL action as investor threatens to sue

Why did Apple's share price fall and is now a good time to buy AAPL ...