Beyond Ripe

AAPL: down 13.5% from its mid-September high

Go to the MainePERS website, and you will see that the largest holding of the pension fund's stock portfolio is Apple, maker of iEverything.  No surprise there.  With a market capitalization of over half a trillion dollars, Apple is the most highly valued company EVER.  Indeed, its market cap exceeds the GDP of all but 23 countries.  Still not sure what that means?  Here is a gallery of comparisons.

Caveat emptor.  Such a momentum stock invariably performs as does a Six Flags roller coaster:  it goes down faster than it goes up.  And Apple's share price may now be succumbing to gravity.  Just three weeks ago a single share of Apple's common stock was worth two iPad minis.  No longer.  Trading at over $700 a share in mid-September, AAPL was fetching a tad over $600 at one point in yesterday's after-hours market.

The reason?  Apple's Q3 earnings, announced at 4:30 p.m., fell short of expectations.  Worse, the company's forward guidance called for reduced profit margins in Q4.  When hedge funds (who are crowded into AAPL big time) hear "lower margins," they sell first, then ask questions later.  Supply constraints, stiffer competition, customer fatigue--doesn't matter.  With the hedgies evacuating, MainePERS has seen its position in AAPL decline in value by almost $22 million.

It is the Law of Large Numbers.  Companies like Apple (even Apple) cannot grow by double-digit percentages forever.  And especially in a contracting economy.  When the stock sprinted ahead by 50% in the first quarter of 2012, maybe portfolio managers at MainePERS should have taken some off the table.  But that's not how the fund's "passive" investment strategy works.  Now the portfolio will be rebalanced the old-fashioned way--by reversion to the mean.

All of which may leave state retirees waiting in line for their bennies:

[update, 10-29-12--]

News today of some upper-echelon house-cleaning at Apple, an admission that the company has disappointed investors.