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

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.

Hedge fund activity in Apple Inc. (NASDAQ:AAPL)

At the end of the fourth quarter, a total of 133 of the hedge funds tracked by Insider Monkey held long positions in the stock, unchanged from the end of the third quarter. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were upping their holdings meaningfully (or had already accumulated large positions).

According to Insider Monkey’s hedge fund database, Icahn Capital LP, managed by the aforementioned Carl Icahn, holds the number one position in Apple Inc. (NASDAQ:AAPL). Icahn Capital LP has a $4.82 billion position in the stock, comprising 16.4% of its 13F portfolio. The second most bullish fund manager is Fisher Asset Management, managed by Ken Fisher, which holds a $1.19 billion position; the fund has 2.3% of its 13F portfolio invested in the stock. Other members of the smart money that are bullish encompass Chase Coleman’s Tiger Global Management LLC, Alex Snow’s Lansdowne Partners, and Phill Gross and Robert Atchinson’s Adage Capital Management.

Since Apple Inc. (NASDAQ:AAPL) has experienced bearish sentiment from the smart money, we can see that there exists a select few money managers who were dropping their entire stakes heading into 2016. Interestingly, Rob Citrone’s Discovery Capital Management dumped the largest position of the “upper crust” of funds tracked by Insider Monkey, comprising about $246.1 million in stock. John Armitage’s fund, Egerton Capital Limited, also said goodbye to its stock, about $161.1 million worth. These transactions are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal, especially given the increase in the number of funds in our database).

Let’s go over hedge fund activity in other stocks similar to Apple Inc. (NASDAQ:AAPL). These stocks are Alphabet Inc (NASDAQ:GOOGL), Alphabet Inc (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), and Berkshire Hathaway Inc. (NYSE:BRK-B). This group of stocks’ market valuations resemble AAPL’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GOOGL 154 15104780 25
GOOG 142 14216537 23
MSFT 140 23419699 27
BRK-B 75 19339281 6

As you can see these stocks had an average of 128 hedge funds with bullish positions and the average amount invested in these stocks was $18.02 billion. That figure was $17.72 billion in AAPL’s case. Alphabet Inc (NASDAQ:GOOGL) is the most popular stock in this table. On the other hand Berkshire Hathaway Inc. (NYSE:BRK-B) is the least popular one with only 75 bullish hedge fund positions. Apple Inc. (NASDAQ:AAPL) is not the most popular stock in this group but hedge fund interest is still above average. So while Apple remains a popular stock, it undoubtedly took a major hit during the latest quarter, as investors sold off stakes and even bulls cut their holdings. Given that, it’s hard to recommend it at this time, even in light of its attractive valuation.

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