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Size Matters: Could Apple Determine Market’s Fate?

Friday, 24 Feb 2012 | 2:10 PM ET

Apple , the largest company in the world by market cap, has become such a big portion of the stock market and such a large core holding of hedge funds that the fate of the revolutionary technology company and the future of U.S. equities are inextricably linked.

Apple Store
Flickr: ping ping
Apple Store

One out of five hedge funds count Apple among their ten largest holdings, according to a Goldman Sachs survey of the industry. Apple shares carries a bigger weight in the S&P 500 than the basic materials, utilities and telecom sectors alone, according to JPMorgan data.

This co-dependent relationship is fine as long as the technology juggernaut continues to globally expand its iPhone andiPad product halo, but a nasty sell-off in the whole market could ensue if this single company were to stumble. Analysts that cover Apple don’t see that happening with a median 12-month price target of $600, or a 15 increase percent from here.

“Size is still not a barrier just yet,” wrote Credit Suisse’s Kulbinder Garcha, who has a $600 price target on the stock, in a note this week. “We remain of the view that Apple fundamentals remain solid, as we believe that the company can drive robust bottom-line growth through a combination of smartphone and tablet growth propelled by distribution expansion and potential within emerging markets.”

Apple made up just 1 percent of the S&P 500 in 2007, but now makes up about 3.7 percent of the benchmark for U.S. equities. According to the Goldman figures, when Apple does make up a hedge fund’s top ten holdings, it is 8 percent of that whole fund, on average.

That’s what has some hedge fund managers like Michael Murphy of Rosecliff Capital concerned. They believe that when a company becomes this widely owned, the best case scenario for its future must already be priced in, making it vulnerable to a selloff.

“Apple has had a great run, but as a hedge fund manager, I get paid to differentiate between great companies and great investments,” said Murphy. “At current levels, Apple is the former.”

It also works both ways.

If the market were to stumble because of an exogenous shock such as a deepening of the Euro credit crisis or an Israel strike on Iran, Apple could come under more pressure than other stocks. This is what happened during the 2008 credit crisis, when profitable and large trades like Apple and Gold became a source of funds for traders who need to raise money to cover their other losing bets.

By comparison, all basic materials companies make up 3.6 percent of the S&P 500 index. Utilities and telecom have 3.4 percent and 2.6 percent weightings in the benchmark respectively. The two largest of the 10 sectors in the index are technology and financials at 20 percent and 14 percent respectively.

To be sure, Credit Suisse says that history shows the size of a company does not become a hindrance until it reaches five percent of the whole market, which would imply a $650 share price for Apple. This occurred with Microsoft in 1999, when the share price peaked after becoming five percent of the S&P 500 and Exxon Mobil in 2008, when it hit a monster 5.6 percent of the index.

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:00 ET on CNBC. Follow @CNBCMelloy on Twitter.

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