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Don’t Blame Institutional Selling for Apple Inc. (AAPL)’s Slide

A cache of financial heavyweights, with more than $100 million in equities under management, deftly dumped Apple Inc. (NASDAQ:AAPL) during the fourth quarter of 2012.

Banks, insurance companies, hedge funds, and pension funds shed millions and millions of shares. Among the big institutions that sold Apple Inc. (NASDAQ:AAPL) were Capital World Investors, which sold 4.9 million shares; Fidelity Management and Research, which got rid of 4.3 million shares; Capital Research Global Investors, which discarded 2.9 million shares; Wellington Management, which sold 2.3 million, and Marisco Capital Management, which shrugged off 1.9 million shares.

Apple Inc. (NASDAQ:AAPL)Bearish option activity was also brisk in the fourth quarter, with powerhouses like Goldman Sachs and Susquehanna International bulking up on puts.

The common conviction is that major investors exert tremendous influence over stock prices. They buy and sell in large blocks, potentially influencing a stock’s movement up and down. And it’s true that swings in institutional demand has a larger effect on stock prices than swings in individual demands. And when a plethora of large investors buy or sell, a stock’s movement is accelerated or decelerated even more.

But not so fast. Studies show the effects are most pronounced when the heavyweights target small caps and thinly traded stocks, not giants like Apple Inc. (NASDAQ:AAPL). So don’t blame Apple’s slide too much on Q4 institutional selling.

A Harvard University and University of Illinois study entitled “The Impact of Institutional Trading on Stock Prices” found no consistent evidence of a significant or positive link between changes in institutional holdings and simultaneous price swings.

The study further pointed out that institutions vary in their strategies and rarely play follow the leader, and by and large offset each others movements.

This could explain why there was heavy selling in Apple Inc. (NASDAQ:AAPL) in Q4, and there were also plenty of bargain hunters snapping up shares as Apple’s slipped. But the robust buying failed to stave Apple’s steep and steady slide. In Q4, Citigroup added 1.8 million shares to its stash to reach 7 million shares. Germany’s Commerezbank Aktiengesellschraft bought 1.5 million for a total of 2.8 million in its portfolio. Credit Suisse added 1.5 million bringing its tally to 3.4 million. Vanguard Group bought another 1.1 million shares to reach a whopping 42 million, and Nataxis bought 1 million to reach 1.3 million shares.

The sellers’ timing looks impressive given Apple Inc. (NASDAQ:AAPL)’s tumble some 25% from its high hit on Sept. 21, 2012 of $705.07 through the end of the year. The buyers’ timing doesn’t look so savvy given that Apple shares have slumped another 12% year-to-date.

Savvy individuals and institutions sell for several reasons, but they only buy for one—they expect shares to move higher.  So while its quite likely sellers were taking profits to book for year end, its also probable they saw some red flags flying. Apple’s 2012 performance up to September was unquestionably stellar and the stock rewarded shareholders well.

These intuitions probably saw Apple’s stock getting ahead of itself, the saturation of the smartphone market, and fewer first-time buyers, and grew concerned over slowing iPhone 5 sales. Definitely not sound grounds on which to buy shares.

Rivals Samsung and Google Inc (NASDAQ:GOOG) continue to ring up sales and take market share from Apple. Data released from research firm Gartner reports Samsung’s Galaxy unseated the iPhone in 2012 as the best selling smartphone. Samsung sold 394.6 million mobile phones last year, with 53.5% of those being smartphones. Apple sold 130 million worldwide.

For 2013, Gartner predicts global smartphone sales will continue to be strong, with about 1 billion units changing hands. A great deal of those sales are expected to come from emerging markets. So if Apple can move quickly on a less expensive smartphone, it stands to benefit. But in the near term Apple may have to grapple with choosing growth (via lower-priced models) or preserving margins by sticking with high-priced models.