In the dark days following the September 2008 market collapse, Apple shares were one bright spot. After initially falling with the rest of the market, the tech giant began a recovery in December of that year and resumed the long upward climb that eventually turned it into the world's most valuable company.
In the four years that followed, Apple was the market's star performer, playing a role in restoring overall investor confidence. It accounted for 5 percent of the value of the Standard and Poor's 500 stock index and over 10 percent of its gain, S&P data show. In mid-September when Apple's stock peaked at over $700 and began to fall sharply, it looked as if the drag of its falling shares on the entire market might become a black hole that threatened to pull everything down into its gravity field.
"It's a stock that was so incredibly over-owned, almost everyone had it," says David Cassese, an associated portfolio manager for consumer, healthcare, and information-technology funds at BlackRock. "It got to the point where there were so many people who owned it, there were no more incremental buyers."
Lipper reported that in September, more than 800 mutual funds owned the stock, with nearly every large-cap growth fund listed as owners. Another 200 hedge funds were invested, some with stakes as high as 20 percent of their holdings.
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Many of those funds were heavy sellers when the stock changed course. With a 70 percent gain this year and an eightfold rise since 2008, funds were quick to book profits. Now that Apple has shed over 20 percent of its value, most Apple analysts are recommending buying the stock.
But will it continue the shockingly fast rise that made it the dominant consumer electronics name, one that led the stock market through the turbulent first decade of the new century?
"That's a tough question," says Cassese. "It seems that Apple is in a transition from a growth stock to a value stock …With a lot of stocks, that has been very painful. There could be a lot of volatility in the stock, and that could upset the market."
Apple once had the lucrative market for sophisticated smartphones and tablets virtually to itself, with the iPhone and iPad bestowing the luxury of very high profit margins for the company, he says.
Now it faces aggressive competition from Samsung (ticker: SSNLF), Google (GOOG), and Microsoft (MSFT). Even the most enthusiastic Apple backers concede that earnings growth will slow, although there is less agreement on whether the outlook is fundamentally different.
"Things have not changed. Apple has always faced cut-throat competition," says analyst Peter Mizek of Jefferies & Co. "Whatever you say now about them, you could have said three years ago. Only the competitors are different. The dynamic is the same. Its rocket-like growth has been phenomenal and going forward, it will continue to have good solid earnings growth."
Why Apple will not burn to the core. Stock market historians can give a long list of hot stocks that have flamed out from overblown expectations and lack of true earnings growth to sustain their lofty status, like Groupon (GRPN) or Blockbuster (BLOAQ).
They would be more hard-pressed to find another case like Apple. There have been no revelations of major earnings disappointments, only a slight downward adjustment in a recent forecast. Its products still sell famously. There are rumblings of disappointment over the iPhone 5, but it's selling briskly. Based on its price-to-earnings ratio, Apple shares are still cheap compared with the rest of the market.
In part, the company is a victim of its own success. The powerful growth of the past five years made Apple "the one sure thing" investors could hold dear, says Cassese.
The market has been desperate for certainty since the 2008 collapse, especially over the past two years as a seemingly endless budget stalemate has threatened to throw the slow-growing U.S. economy back into recession. Now it's the fiscal cliff approaching at year-end.