HOW TO PLAY IT-When a stock darling becomes a "dud"

NEW YORK Wed Oct 24, 2012 4:21pm EDT

NEW YORK Oct 24 (Reuters) - After long stints as darlings of the stock market, three of Wall Street's most widely-owned companies have hit a wall this month.

Apple Inc. lost 8 percent from the start of the quarter through Tuesday's close; Google Inc. fell nearly 10 percent; and upscale fast food restaurant Chipotle Mexican Grill fell 25.6 percent to a 20-month low. The benchmark Standard and Poor's 500 index was down 1.9 percent over the same time.

There are reasons for the recent poor performance of each stock, of course, from Google badly missing earnings estimates to the lingering fallout after noted short-seller David Einhorn panned Chipotle's stock in an Oct. 2 presentation.

But the darling-to-dud flip is often exacerbated by something else. Fund managers and advisers say that each company's past reputation as a can't-miss investment may now be working against them.

"When you see a stock get hit hard after it was priced in its upper range, you typically won't have anybody jump back in until it's trading at a discount," said Robert Luna, a financial adviser with SureVest Capital Management in Phoenix.

Negative momentum in a company's shares is often only reversed by strong earnings or a significant event, he said.

It's too early to tell whether recent pullbacks in Apple, Google and Chipotle are short-term reactions or the start of a prolonged slowdown, but some investors aren't waiting. Here are some of their strategies.

LOOK AT VALUATIONS

Google and Chipotle may be the most likely companies to continue their slide, analysts and advisers said.

Luna, for instance, sold his firm's position in Google after it missed analysts revenue projections and earnings estimates last Thursday. The company's shares dropped 8 percent that day.

"We still like the company longer term, but we felt like its share price had gotten ahead of itself," said Luna, who still made a profit on the shares, having bought them in January and February when the company traded in the high $500s. Google closed at $680.35 Tuesday with a P/E ratio of 21.2, compared with the S&P 500's P/E ratio of nearly 16.

The acquisition of tablet and smartphone maker Motorola Mobility for $12.5 billion in May could continue to drag down Google's earnings, said Rick Summer, an analyst at Morningstar. Daniel Ernst, an analyst at Hudson Square Research, noted that the company's "core business remains strong" but may be offset by lower-margin hardware sales and depressed mobile ad rates.

Analysts are also more pessimistic about Chipotle's prospects. After years of growth, expansion efforts would likely be in smaller markets, which could drag down Chipotle's overall profits, noted Andy Barish, an analyst at Jefferies & Co.

He cut his price target by almost 30 percent, to $215 from $305, after the company missed earnings estimates and announced growth would likely slow next year. Barish now rates the company an underperform. The company's shares closed at $236.24 on Tuesday and trade at a P/E ratio of 27.6.

Overall, analysts tracked by Thomson Reuters have a median price target for the company of $300, compared with a $390 just 30 days ago. Eighteen of the 22 analysts who follow the company rate it as a 'hold', meaning that it should trade roughly in line with its competitors, according to Reuters data.

APPLE COULD STILL SHINE

Apple could still remain a stock market darling despite its recent drops, analysts said.

"If you buy into the theory that we're still in the early innings of the tablet adoption cycle then it has considerable room," said Channing Smith, a portfolio manager of the $14 million TacticalShares Dynamic Allocation Fund. He pinned the company's recent declines on momentum traders selling after riding the share price higher. Its shares hit an all-time high of $705.07 on Sept. 21, but have fallen 13 percent since then, to close at $613.36 Tuesday. That's still up 51.5 percent for the year.

Smith has a price target of $750 for Apple, in part because he thinks it has better growth prospects than the broader S&P 500 and deserves a higher price-to-earnings multiple than its current 14.9.

Sandy Villere, a portfolio manager of the $242 million Villere Balanced Fund, said that Apple "looks pretty cheap" considering its potential for growth with the new iPad Mini and the long-rumored Apple television sets.

The 56 analysts tracked by Thomson Reuters who rate the stock have a median price target of $775 for Apple's shares, up slightly from $770 30 days ago.

Thomson Reuters StarMine intrinsic value for Apple, meanwhile, is $871 a share - using estimated growth over the next decade along with a combination of analyst estimates for the next five years and projected growth rates past that period.

IMPACT ON FUNDS

A slowdown in Apple shares would hurt mutual fund investors the most, noted Tom Roseen, the head of research at Lipper, a Thomson Reuters company.

In the 1,132 funds that hold its shares, Apple makes up an average of nearly 5 percent of assets, according to Lipper data. The company's 210 percent return over the last three years accounted for nearly a fifth of the gains in large cap funds over that same time, according to Lipper.

"If Apple gets a black eye, it's going to give a lot of funds a black eye," Roseen said.

The most exposed funds include the Fidelity Select Computers Portfolio, Berkshire Focus Fund, and the Putnam Global Technology Fund. All have between 23 and 25 percent of their assets in Apple shares.

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