Ignore The Hype: Here is Why Apple Inc. (AAPL) Lost 14% in Two Weeks

We are bearish on Apple Inc. (NASDAQ:AAPL) because hedge funds collectively owned only about 2.9% of Apple’s outstanding shares at the end of March. We also broke the news that one of Apple’s largest hedge fund holders, Lone Pine Capital, sold its $850 million Apple position during the second quarter due to concerns about the Chinese market. Apple’s biggest cheerleader has been Carl Icahn, who called this investment a “no-brainer”. In an interview on Wall Street Week in May, Icahn said that the stock is undervalued and when it declines, he prefers to buy more shares. He had $6.5 billion invested in Apple at the end of the first quarter, which account for 30% of all hedge fund positions in the stock. With this logic, we could see an increase of Icahn’s stake in his following 13F filings. Meanwhile, it’s important to mention that hedge funds own on average about 5.8% of all publicly traded stocks. They are 50% underweight Apple shares despite Icahn’s huge position. We believe this number will go down further when they file their second quarter 13F filings in 10 days.

We consider that hedge fund sentiment surrounding a stock is important, because it falls in line with the results of our research, which concluded that smart money’s favorite large-cap picks underperformed the market on average in the last decade. On the other hand, we also determined that their top small-cap ideas are capable of beating the market by double digits over the long-term (read more details here). This is why we have been following 15 most popular small-cap picks among a select group of around 700 investors and this strategy returned 123% in the last 35 months, beating the market by 65 percentage points.

All in all, I am long term bearish on Apple Inc. (NASDAQ:AAPL) because I believe the smartphone market will effectively be commoditized by the end of the next recession (this may be in two years or it may be in four years, I can’t predict recessions). Apple’s brand/image is the biggest edge it has over its rivals. Not its ecosystem. I switched from iPhone to S6 without any trouble three months ago. I think by the end of the next recession consumers will have enough incentives to try out other phones that carry much smaller profit margins. It seems like they already started doing that in China last quarter, which is why investors started to discount Apple shares in the last couple of weeks.

Disclosure: none