This is a syndicated repost courtesy of Money Morning – Only the News You Can Profit From. To view original, click here. Reposted with permission. The federal government would love nothing more than to apply the 35% corporate tax to the estimated $1.7 trillion in cash U.S. multinational companies have designated as foreign investments –…
This is a syndicated repost courtesy of Money Morning – Only the News You Can Profit From. To view original, click here. Reposted with permission. If you thought all the talk about taxing the rich meant the government would not be reaching deeper into the pockets of most Americans, then you haven’t heard about the…
Assuming the Dow Jones Industrial Average represents the biggest, most influential companies in America, Apple Inc. (Nasdaq: AAPL) easily qualifies.
With its massive market cap, trend-setting products, and global brand recognition, it is easy to argue Apple belongs as much or more than any of the current tech companies in the index.
So what gives?…
In a nutshell, Apple stock is too rich for the Dow Jones Industrial Average.
Because the Dow Jones is price-weighted, Apple’s current $565 share price would simply overwhelm the index.
“It wouldn’t be the Dow Jones Industrial Average,” Nicholas Colas, chief market strategist at ConvergEx Group told the Associated Press. “It would be the Apple Plus Some Other Stuff Index.”
In this case, a price move of just 5% in Apple stock could push the DJIA up – or down – about 200 points.
Looking at it another way, had Apple been added to the Dow Jones in 2009 instead of Cisco Systems Inc. (Nasdaq: CSCO), the Dow would now be over 15,000.
That’s well above the Oct. 2007 record of 14,164 and 2,500 points higher than where it stands today.
With that kind of heft, it’s no wonder the Dow has shunned Apple.
How the Dow Jones Industrial Average Works
But it’s not just Apple. Other Dow candidates trade high in the triple digits as well.
Over the past year, the two tech titans have filed dozens of patent infringement lawsuits against each other in 10 countries. Most seek to block the sale of one or more of the other’s smartphone and tablet products.
The biggest case, filed in San Jose, CA, is scheduled for a July trial, which U.S. District Judge Lucy Koh is desperate to avoid. (She called the case “cruel and unusual punishment” for the jury.)
Earlier this week Koh ordered the CEOs of both Apple and Samsung to meet in mediation sessions, but nothing came of the meetings.
The mutual stubbornness makes sense when you realize what’s at stake.
Apple Inc. (Nasdaq: AAPL) investors have cringed as the stock slipped about 16% from its peak over the last two months.
But given the absence of any catastrophic bad news, why is AAPL stock tumbling? And where will it stop?
It’s important to note off the bat that Apple’s fundamentals are just as strong as they were last fall when the stock began its huge run-up from just under $400 to $636.23 on April 9 (it hit an intraday high of $644 on April 10).
In short: Apple still expects to make a mountain of profit this year. Apple still has over $100 billion in cash with no debt. The company’s price/earnings ratio is about 13.50 for the trailing 12 months and its forward P/E just 10.
So something else must be driving down Apple stock. Some of it is logical, some of it emotional – but none of it permanent.
Let’s take a closer look:
- A Parabolic Rise: First and foremost, AAPL simply rose too far too quickly. Rapid gains beg profit-taking.
“It was clear to me that this kind of reversal was coming – and sooner rather than later,” said Money Morning Chief Investment Strategist Keith Fitz-Gerald when the selloff started in April. “The shares had soared 75% in just five months – one analyst actually described the performance as “euphoric.'”