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Apple Inc. (AAPL): Should You Follow Analysts’ Predictions?

Notorious Austrian-British economist Friedrich Hayek in his book “The road to Serfdom” said that “we can in a measure learn from the past to avoid a repetition of the same process”. We can, in a way, attribute this quote to the investing and take a look back at some predictions regarding different companies and see if they materialized and what we can learn from them. In this article we are going to focus on Apple Inc. (NASDAQ:AAPL). One year ago, Citigroup analyst Jim Suva discussed the stock on CNBC and provided his rating and price target, which didn’t exactly materialize, but rather the stock turned the opposite direction. This shows the difficulty when it comes to predicting a stock’s move, even if the horizon is narrowed to just one year. It is particularly hard to predict the near-term performance of large-cap stocks, which are generally more competitively priced. Therefore, in this article we are going to do a throwback to the last year and analyze Apple Inc. (NASDAQ:AAPL)’s performance over the past 52-weeks comparing it with predictions of analysts and investors along the way.

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The idea is that often predictions go wrong, which can substantially affect the returns of many investors that relied on those predictions. An example is BlackBerry Ltd (NASDAQ:BBRY), which in 2007 was trading above the $200 per share mark only to slide to $50 a year later and currently it is a stock that remains mostly overlooked. Investors often assume that current trends may go indefinitely, which is why many hedge funds remain bullish on Apple, focusing on the present performance and often ignoring the long-term horizon. A year ago, Suva rated the stock as a ‘Buy’ and had a 12-month price target of $145 per share.

What’s also interesting to point out is that Suva said that Apple Inc. (NASDAQ:AAPL) was in Citi’s Focus List, which included its “highest conviction stock ideas”. The investor also said that Apple was going to beat the estimates, which would move the stock higher and while the company indeed posted better-than-expected results for the following quarters, the stock still kept trading lower. As we look back, we can see that the stock never hit that mark and has lost 13% over the last 52-weeks. In October 2015, Suva reiterated the ‘Buy’ rating and $145 price target on Apple, but removed the stock from the Focus List, citing “near-term conviction in other stocks”. In January, the analyst cut the price target to $130, maintaining the ‘Buy’ rating.

Suva is not the only analyst that got it wrong predicting Apple’s future stock performance, most analysts that cover the stock cut their price targets this year, although most of them maintained ‘Buy’ and ‘Outperform’ ratings.

We keep a close watch on Apple Inc. (NASDAQ:AAPL) and the smart money sentiment among some 800 hedge funds and other institutional investors that we track as part of our small-cap strategy (see more details here). Insider Monkey co-founder Dr. Inan Dogan is bearish on Apple over the long-run as he said in a CNBC intervention last year. Moreover, in an article in August, Dr. Dogan wrote:

“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.”

When we look at the smart money sentiment, it also suggests that the hype surrounding Apple Inc. (NASDAQ:AAPL) should be ignored. The stock had ranked as one of the most popular in terms of the number of bullish funds for several quarters in a row, but during the last quarter of 2015, it dropped to the seventh spot as the number of invested funds stayed the same, but other stocks gained more traction. However, what’s also important is that the funds from our database own just 3% of the company’s outstanding stock.

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Over the last year, several big names dropped Apple Inc. (NASDAQ:AAPL) from their portfolios over concerns regarding the company’s market share in China and missing iPhone deliveries estimates, including billionaire Stephen Mandel’s Lone Pine Capital, which unloaded 6.84 million shares during the second quarter. One of the company’s biggest fans last year was billionaire Carl Icahn, who projected a $240 price target last year and said on several occasions that Apple is his favorite stock and that he prefers to buy more shares when it loses ground. However, Icahn’s last several 13Fs showed that he didn’t increase his position over the course of 2015 and sold 7.0 million shares during the last quarter. In this way, Icahn owns 45.76 million shares of Apple worth $4.82 billion as of the end of 2015, which account for some 25% of the aggregate amount held by all the investors in our database.

To sum up, it’s important to keep in mind that generating alpha from large-cap stocks, such as Apple, is difficult and only few investors or hedge fund managers can do that over the long-term, which is why it is not a good idea to focus on the hype that surrounds a stock currently and bet on the long-term performance of a stock, based on the current trends.

Disclosure: none