Opinion: Here’s why the news about Apple is so bad

Bad news tends to come in waves, so be prepared for more

CHAPEL HILL, N.C. (MarketWatch) — The bad news about Apple is likely to keep on coming.
And that’s really saying something, since over the past six months the news about the company’s earnings and growth prospects already has been lopsidedly negative.
I have confidence in this bad-news forecast not because I have any special insight into Apple’s AAPL, -3.76%  business. It instead derives from the all-too-predictable ways in which Wall Street analysts revise their forecasts: A downward revision is far more likely to be followed by another downward revision than it is by an upward one.

One researcher who has studied analyst behavior is Michael Clement, an accounting professor at the University of Texas, Austin. His research has shown that analysts are both slow to react to new information (especially bad news) and loath to deviate far from the consensus of their fellow analysts. Both factors conspire to make it look as though analysts are piling on when bad news begins to mount. A good case in point is the recent prediction of a technical analyst that Apple’s stock will fall to $70. (It’s now around $100.)
Needless to say, this avalanche of downward revisions causes a stock to decline even further. And that, in turn, often leads analysts to downwardly revise their forecasts yet again. The picture that emerges is of a downward spiral of bad news, downward revisions and price declines.
Read: Apple is hated almost as much as the big banks
Take the number of revisions over the past 12 months among the 50-plus Wall Street analysts who track Apple. As you can see from the chart at the top of this column, almost all them — 81%, in fact — upwardly revised their EPS forecasts in January 2015. This percentage remained above 70% for the first six months of last year, and has been falling steadily ever since. This month, only one Wall Street analyst has revised his forecast upward, while 63% of them have revised it downward.

Apple dials in India's smartphone market

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By the way, it’s not Monday-morning quarterbacking for me to point out this analyst tendency. I also devoted a column to this very subject in early August, when Apple’s stock was 13% higher than where it is today. I wrote then that “things are going to get worse for Apple before they get better.”
Anyway, how will we know when the tide is turning for Apple? One leading indicator will be when the proportion of analyst upward revisions jumps back above 50%, and especially if there are two back-to-back months of more positive than negative revisions.
Bear in mind, however, that it can take a long time for the analyst community to shift its mood. The last time Apple was caught in a downward spiral was in late 2012 and early 2013, when Apple’s stock fell 45%.