Investors roll the dice as Apple's value booms

Mon Mar 5, 2012 4:50pm EST

People walk past an Apple billboard advertising the iPad 2 in downtown Shanghai March 1, 2012. REUTERS/Carlos Barria

People walk past an Apple billboard advertising the iPad 2 in downtown Shanghai March 1, 2012.

Credit: Reuters/Carlos Barria

(Reuters) - The world's most valuable company has turned into a bit of a casino stock.

Since Apple Inc on February 29 became only the sixth company in U.S. history to top $500 billion in market capitalization, trading has become more volatile, indicating that more investors are tracking headlines and looking for quick gains.

Apple has gained 32 percent since the beginning of the year, outstripping its gains for all of 2011. It accounts for more than 4 percent of the weight of the S&P 500 index, a kind of outsized standing that has caused its moves to dictate market direction on a daily basis.

That's a trend that is causing consternation among some players in the market. They note that other companies that had become members of the elite $500 billion club not only couldn't sustain their standing, but weighed on the entire market as they fell.

For long-term investors, the stock of the iPad and iPod maker has been a winner, the ultimate in buying and holding. From a short-term basis, buyers have gotten much more fickle.

"Apple has become a favorite daytime trading stock for short-term traders. It's one of the rare stocks that have momentum followers and that move on headlines that are not related to earnings," said David Rolfe, chief investment officer at Wedgewood Partners in St. Louis, Missouri. The firm manages $1.5 billion in assets and owns Apple shares.

Intraday swings in Apple are at the most volatile levels since October last year. The swings have averaged around $12 a day for the past two weeks, compared with about $14 in October.

On Monday, Apple shares plunged 3.1 percent in about 10 minutes around 11 a.m., which pushed the company's market cap below that $500 billion threshold. Trading volume spiked during the drop to almost 3.8 million shares, the heaviest 10 minutes of turnover since February 15, when the stock's shift in direction pulled the market with it.

Apple shares typically run up in the days ahead of a major product launch, but the shares have gained sharply this year, in part on anticipation over a new generation of its popular iPad tablet.

The new iPad 3 - which is expected to offer a better screen, camera, processor and 4G wireless capabilities for the same price - is to be unveiled on Wednesday. Any major disappointment may weigh on the shares.

For Apple, a share price of $537.54 marks the level that pushes it above a market cap of $500 billion.

There are concerns that Apple, because of its size, will start to hurt the overall market should the euphoric trading that pushed it to a record high of $548.21 on March 1 subside.

"We used to say 'if GE goes, then the whole country goes.' Now we say 'if Apple goes, the whole country goes,'" Rolfe said.

Apple joins only a handful of companies - Microsoft, Exxon Mobil Corp, Cisco, Intel and General Electric - that have crossed the $500 billion mark. None of those other stocks was able to sustain that value.

"How the others - and equities in general - performed after hitting that threshold wasn't good," Jason Goepfert, president of SentimenTrader.com, said in a report last week.

As Apple shares dipped on Monday, activity in the options market picked up, ranging from investors hedging their long positions in the stock to betting on a rebound.

"Short-term implied volatility for weekly options that expire this Friday jumped more than 10 percent as nervous investors bought options to hedge positions," said Tim Biggam, options strategist at options trading firm TradingBlock in Chicago. Implied volatility measures the expected magnitude of share price movement conveyed by option prices.

"There was a mad rush for out-of-the money puts mostly congregated in the $520 to $530 range expiring this Friday and on March 16 for standard one-month options," he said.

Despite the high price, Apple look like a value stock. It trades at 15 times earnings, close to the 14 earnings multiple of the broad S&P 500 index, even though its earnings per share grew nearly 83 percent last year, nearly four times that of the broad index.

In February, Apple shares have moved than 1 percent up or down on a single day in 12 sessions.

(Reporting By Angela Moon; Editing by Leslie Adler)

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