Hedge Funds Save Apple’s Stock…For Now

When Apple announced on Monday that founder, CEO and chief visionary Steve Jobs would be taking a leave of absence for health-related reasons, many investors braced for a huge selloff when the markets resumed trading Tuesday following the Martin Luther King holiday.

They got a glimpse of what might happen when the stock fell more than 6 percent in Germany on Monday. In pre-market trading Tuesday, the futures market was indicating a 5 percent drop in the shares.

As it turned out, the stock, which dropped more than 6 percent during the Tuesday trading session, closed down only about 2.3 percent for the day. In the three days since the announcement, the stock is down less than 5 percent.

The modest decline was helped, in large part, because Apple shrewdly timed the Jobs announcement one day before it planned to release quarterly earnings. And the results were a doozy. Quarterly earnings surged 78 percent on a 71 percent increase in revenues, thanks to strong sales of its iPads, iPhones and Macintosh computers.

Afterwards, Wall Street’s analysts excitedly upped their price targets on the stock, including Goldman Sachs, JPMorgan Chase, and Citigroup Investment Research.

Yet, while Apple’s dominance in its markets and its future growth and profit margins are astounding, perhaps the biggest reason why the stock has mostly held up this week is because the hedge funds still believe in the Apple growth and valuation story and at this point are not very concerned about Jobs’ future. After all, Apple was one of the top10 owned stocks by hedge funds in the third quarter.

At least eight well-known firms counted the stock as their number one holding. Three of them increased their position in the stock during the September period, including Stephen Mandel Jr.’s Lone Pine Capital, David Shaw’s D.E. Shaw and James Simons’ Renaissance Technologies, which nearly doubled its stake.

The other firms that made Apple their largest position included Ken Griffin’s Citadel, Chase Coleman’s Tiger Global, Mark Kingdon’s Kingdon Capital, John Kleinheinz’s Kleinheinz Capital Partners and Joe DiMenna’s Zweig-DiMenna.

Six other firms counted Apple as their second largest holding. They included Lee Ainslie’s Maverick Capital, John Griffin’s Blue Ridge Capital, Philippe Laffont's Coatue Management, Robert Raiff’s Raiff Partners, Paul Tudor Jones II’s Tudor Investment, and Adage Capital Management, founded by former Harvard Management honchos Robert Atchinson and Phil Gross.

In fact, Tudor was one among at least six firms that took initial positions in the third quarter. They included Jana Partners, which made Apple its fifth largest holding, Viking Capital, Third Point, Trafelet and Omega Capital.

Interestingly, seven of this group of large holders are known as Tiger Cubs — firms whose founders at one time worked for Julian Robertson’s Tiger Management.

On Tuesday morning, one of the major holders told me he was mostly standing pat, although he had lately been trimming the position. He was confident the stock was not expensive based on several measures, including its price-to-earnings ratio. “I know the product set for the next 18 months,” he added. They just need to keep trotting out new, interesting cool products, he added.

But, what about Jobs? “I’d rather him be healthy,” the hedge fund manager said. “If he were dead it would be a bad thing,” he deadpans, no pun intended. In other words, he wasn’t going to panic and dump his shares.

Analysts understand the role hedge funds are playing in Apple’s stock. Clyde Montevirgen, an analyst who follows Apple for Standard & Poor’s, says he has talked to some hedge funds and they are concerned about Jobs. They know it’s a risk. However, he says they are mostly concerned about how Apple is competing in certain markets. He stresses that a lot of institutions hold Apple’s stock. But, addressing hedge funds, he asserts: “Considering a lot of stock is held by them, and the stock held up is a good indicator.”

Hedge funds are sticking with Apple, for now. But, if one day the hedge fund set decides Apple is not worth the risk, this stock will quickly tank, regardless of the strong fundamentals and Wall Street’s higher target price.