Tuesday, Jim Cramer bashed Apple’s upcoming product introduction in September. Although he did not know what it was, he was certain it would be a “loser.” His commentary was on the heels of Goldman Sachs removal of Apple from their Conviction List. On both counts, Apple should have been under pressure particularly given the amount of media attention given to the events, but interestingly, the stock ended up on the day. What gives?
First, for those who follow the adds and drops from the Goldman Sachs Conviction List may recognize this to be a lagging indicator. Typically within weeks of being added, the anointed stock will stabilize and fall; or within weeks of being dropped, the orphaned stock will begin an ascent.
Second, in a perverse way, Goldman as a Lagging Indicator supports Jim Cramer’s argument that stocks under pressure only reverse when there is total capitulation. For whatever reason, this axiom holds true for stocks. One wonders if it is a self-fulfilling prophecy amongst hedge fund managers, they all believe it so it holds true. They don’t start buying a stock until all analysts have downgraded that stock.
That could take a while. To date, of the analysts polled by Briefing.com, more analysts rate or reiterated Apple as a Buy or Overweight stock, rather than a sell, although price targets have been moving down from mid-to-high $700s to an average of mid-$500s today. With the stock trading at $428 today, current price targets represent a better return on the stock purchase today then they did at in the summer when Apple’s world was still rosy. Even Goldman Sachs, while dropping Apple from Conviction List, has a price target of $575 on Apple, in the upper range of analysts’ estimates and representing a 34% return from current levels. Not bad.
Many suggest Apple’s stock price future depends on new product introductions. Jim Cramer called it a certain loser, but which product was he referring to? There are rumors of two new iPhones and a new iPad mini. These are really just evolutions. One iPhone is rumored to be an iPhone 5S, with upgrades akin to the upgrade from 4 to 4S, and another iPhone is rumored to be a slimmed down, less-expensive iPhone with a different type of casing, most likely in color. Investors may appreciate these higher-margin upgrades. Each of these will operate, reportedly, on the upcoming iOS7, although it is also rumored to be behind schedule. The iPhone 5S would support Apple’s current product run rate at current average selling prices (ASPs). Upgrades are expected by investors and are adopted by consumers as part of a replacement cycle. The lower-priced iPhone would presumably address demand in emerging markets.
However, should Apple introduce a new product category, such as an iWatch, it would be a certain catalyst. An iWatch would add a new source of revenue and profit for Apple. The demand momentum behind the iWatch is difficult to ignore given the success of the Nike + FuelBand and the demand for the Pebble Watch. And presumably Apple could create an even more robust watch than the other two given the many technologies Apple has at its disposal: touch screens, accelerators, GPS, cellular, and supply chain…not to mention brand.
Has Apple simply become the stock pundits love to hate? There doesn’t seem to be as much bite behind the Goldman downgrade as there is media coverage, when the downgrade still represents a 34% return. And Jim Cramer’s certainty on the next Apple product introduction being a loser also is tough to discern, because if the next new product is an iWatch, Apple could have a runaway winner on its hands.
