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Apple Inc. (AAPL): Why Are Hedge Funds So Cautious?

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Is Apple Inc. (NASDAQ:AAPL) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are then given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Apple has long been a darling of these elite investors that we track at Insider Monkey, ranking as one of their top-two picks for several quarters running; that is, until the fourth quarter, when Apple tumbled to seventh (sixth if we don’t count both classes of Alphabet shares), being surpassed by the likes of Microsoft Corporation (NASDAQ:MSFT), Facebook Inc (NASDAQ:FB), and Amazon.com, Inc. (NASDAQ:AMZN) in popularity. It’s not that Apple Inc. (NASDAQ:AAPL) lost popularity; overall, hedge fund sentiment was unchanged, with the stock being in 133 hedge funds’ portfolios at the end of the fourth quarter of 2015. However, it should be noted that we added about 50 actively-reporting funds to our system during the fourth quarter, which is why several other top stocks saw large jumps in ownership, while Apple remained flat. This suggests that there was actually quite a bit of selling of the stock during the quarter.

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Interestingly, even Apple bulls appear to have grown cautious. David Einhorn of Greenlight Capital, a long-term shareholder of Apple, had this to say about the company’s performance and valuation in his fund’s letter to investors for the first quarter of 2015:

“AAPL shares advanced 13%, as the iPhone 6 has proved to be a blockbuster that drove the company to 30% revenue growth and 48% EPS growth in the December quarter. AAPL also announced the April launch of the Apple Watch, its first new product category in five years. While we have modest expectations for Apple Watch and don’t expect AAPL to maintain this level of growth, the market expects even less, as it continues to value AAPL shares at a discounted valuation. We believe that AAPL is a superior company that merits a premium multiple.”

Yet despite Apple shares having fallen by nearly 22% over the past year, pushing their forward P/E down to nearly single-digits, Mr. Einhorn sold nearly 5.00 million Apple shares during the fourth quarter. During a CNBC interview in October, Carl Icahn said about Apple that “even in a bear market – it may get hurt, it may go down – but I think Apple is still ridiculously underpriced.” He later added that if the markets weren’t so poor at the time, he would consider buying a lot more shares. Yet Mr. Icahn himself also ended up cutting his position in Apple during the fourth quarter, by 14% to 45.76 million shares.

Let’s move on to the next page, where we take a detailed look at how Apple was traded during the fourth quarter.

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