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Shock Call: Apple to Drop 50%

Friday, 7 May 2010 | 1:24 PM ET

The few lucky investors that purchased Apple at $199 following the mysterious electronic plunge in the markets Thursday made a quick 20 percent return as the stock closed above $240. One of those buyers was definitely not Edward Zabitsky. He believes the stock is going to $126 and recommends selling it short.

Zabitsky, who founded his research firm Active Communications Integration in 1997 to consult the telecom industry and institutional investors, believes one of the most-favored stocks on Wall Street will decline nearly 50 percent because of competition from phones using Google’s Android software and because of a double dip in the American economy that will hit luxury brands as a consumer and government debt bubble bursts.

“Apple is a luxury brand and in the past has correlated very well with LVMH Moet Hennessy and Christian Dior,” said Zabitsky, who is based in Toronto, in an interview today. “America didn’t get rid of the bad debt, the government just took it over and consumer credit is trending down.”

To be sure, Zabitsky will be the first to tell you that he has been dead wrong on Apple this year and did not expect that this economic and consumer recovery to be so strong. But this analyst, whose macro perspective is rare for someone covering individual companies, is not letting this past mistake influence this call. To put his $126 target in perspective, the average forecast from Wall Street analysts is $300.

Apple led the market lower today as risk-averse investors took profits in past winners to raise some cash. Investors remain on edge following one of the most volatile days in the history of markets.

For what it’s worth, Zabitsky declined to reveal his models that get him to the $126 figure, but said it was based on much lower iPhone prices hitting margins. The increasing capabilities of phones made by HTC and the end of the AT&T exclusivity contract will be the catalyst for that plummeting profitability.

“When the iPhone came out it was grossly different,” added the analyst. “Apple has raised the bar on what’s normal, but other phones are easily narrowing the difference because web technology is easier to program.”

Investors are suspicious of this call, especially considering Apple has $25 a share in cash alone, they said.

“Going back to 2006, Apple hasn’t been subject to the economy,” said Pete Najarian, co-founder of OptionsMonster.com and TradeMonster.com. “It shows people will hold onto their gadgets even if the economy gets tough.”

Added Najarian, “If he is right and economic circumstances cause Apple to drop to $126, we’ve got much bigger problems to worry about than that.”

With reporting by Jennifer Dwork.

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Trader disclosure: On May 7, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour Owns (AAPL), (BAC), (MTL); Terranova Owns Gold; Terranova Owns (XCO), (AGU), (SWN), (PFE); Terranova Owns Crude Oil; Terranova Is Short (CMA); Karabell Owns (AAPL), (C), (GS), (CME); Karabell Owns (ATHR); Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); jarian Owns (C) Calls; Najarian Owns (CLF) Call Spreads; Najarian Owns (FRX) Calls; Najarian Owns (MS); Najarian Owns (MTL) Preferred; Kelly Owns (FXE) Puts; Kelly Owns (FXB) Puts; Grasso Owns (NDAQ), (DYN), (LPX), (ASTM), (ABK), (BAC), (BGP), (C), (CVGI), (JPM), (NEM), (PRST), (PFE), (BA), (T), (CSCO), (X)

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