Too much Apple!

Why are major hedge funds exiting Apple?

Apple may be the most valuable company in the world today but that has not stopped US hedge fund managers from reducing their stake in the company. With a market capitalization of $750 billion, it is almost twice as valuable as Microsoft or Google. While some of the biggest ETFs of Vanguard and Blackrock continue to hang on to Apple (for obvious allocation reasons), many smart hedge funds are making a rush for the exits. What is the story?

The story is mixed…

It is not that the Apple story does not have its die-hard fans. Apart from the ETFs, Carl Icahn continues to be a big bull on Apple. In fact, he has been one of the fund managers to stick his neck out and predict a market cap of $1 trillion for Apple. Ray Dalios of Bridgewater (the world’s largest hedge fund) is another star manager who has increased his stake in Apple. But the winds of change are visible among hedge funds like Omega, Coatue and Rothschild. But more worrying for Apple could be that David Einhorn of Greenlight has also started selling Apple. After all, few hedge fund managers have identified sell candidates as well as David Einhorn in the last decade (Remember Lehmann and Enron). But why are investors exiting Apple, especially after the successful launch of its I-Phone 6, which has taken the markets by storm? There are actually 3 key reasons for the same.

Still a hardware company…

That is the first major refrain that hedge fund managers have about Apple. While some of its products like I-Phone, I-Pad, I-Mac and I-Pod may have changed markets, it still remains a hardware play. Hardware stocks in the US typically get a discounting of 11-12 times of net earnings plus cash. At its current market price, Apple is quoting slightly above that figure. Even assuming that Apple continues to grow, the margin of safety is limited on the stock.

Questions over I-Watch…

While the I-Watch continues to be an electronic product, it is not exactly an extension to its current product line. In a way it is a bit like the Google car. With the I-Watch, Apple may have got into a product which is more lifestyle than utility. Its utility has not been tested and initial feedback on the demand and features is not too flattering. That raises a big question mark over its watch strategy, although it may be early days.

It is the dollar, after all…

A strong dollar is spooking Apple’s global profitability. With a rate hike likely at some point in 2015, dollar could only get stronger. That is the immediate worry for many managers. In a slowing world economy, US dollar still rules the roost. A globally spread Apple will not be pleased. That is not great news! ©

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