If you read my Week in Review – March 13th edition, you saw that Apple had a very tough week dropping by 6.06% for the week compared the S&P dropping 1.92%. I believe there are three main reasons for the drop this week:
- Alex Guana from JPM Securities downgraded Apple to “market perform” from “market outperform.” This is the first downgrade for Apple since October of 2010. Guana said that slowing sales momentum at Hon Hai (Foxconn) might signal lower revenue for Apple. Foxconn makes many of Apple’s products. This downgrade was a major reason for the selloff on Wednesday and the stock never fully recovered after this. However, a number of analysts were quick to challenge Guana’s theory. First, Oppenheimer’s Yair Reiner said “the correlation between Apple and Hon Hai’s revenue appears to be a product of coincidence more than causality.” Reiner went on to add “the 21% of Hon Hai’s revenue that comes from Apple is a relatively modest amount of Hon Hai’s revenue momentum.” Next, Credit Suisse initiated coverage on Apple with a rating of “outperform” and a target price of $500. The Credit Suisse analyst projects earnings and revenue growth of 50% and 46%, respectively.
- There were some unsubstantiated rumors that Steve Jobs was going to step down permanently as CEO. I highly doubt that this is true since he was just on stage a few weeks back to introduce the new iPad 2. I find it funny that this “rumor” came out just before the March option expiration.
- The iPad 2 is sold out everywhere. You would think that this would be a good thing for Apple, but some have attempted to spin this as a negative. Some people are saying that the shortage of the iPad 2 is going to result in increased sales of the Xoom and hurt iPad 2 revenue. I highly doubt that the shortage is going to make people change their minds and buy the Xoom instead of the iPad 2. I believe the shortage is just going to make people want the iPad 2 even more.
I believe these are the three primary reasons for Apple dropping by 6.06% during the week. I actually took advantage of the drop on Wednesday the 16th by buying an April call at the $350 strike price for $7.15. I went ahead and sold the call on Thursday the 17th for $7.70. That ended up as a one day return of 7.7% for me.