Random Thoughts on Apple

Is it possible that a company that grew to be the dominant axe in Technology, became the largest capitalization firm in the world, and created many new categories of products, is still misunderstood by Wall Street and the Financial Press?

The short answer is yes. Apple (AAPL) remains an enigma to much of the Street. The longer answer is nuanced and complex. and therefore ignored by most players.

In no particular order, lets look at a few points on Apple prior to their earnings report this afternoon:

• Apple has run into the law of big numbers. From the introduction of iPod to its peak in 2012 the stock has gained ~9,300%. That is a number that is simply and obviously unsustainable.

Obvious? Not to everyone: Lots of hedgies plowed into Apple at $500, $600 and even $700, paying little attention to how over loved and over owned Apple had become.

• Want a more objective measure of overowned/over-loved any stock is? Look for companies that have these 3 characteristics:

1) More than 90% institutional ownership;
2) More than 90% Buy or Strong Buy;
3) 1000% gain over the prior 3 years.

You then wait for the 1st technical break. (Look out below!)

• Historically, companies with these 3 traits have presented a terrible risk reward ratio — and Apple was right there at the top and during the prior year. You can tweak these numbers when you run a screen to get a shorter list of dangerous names;

• Apple garners most of the profits in the mobile space. (See this this and this) Android may be capturing market share, but you get that when you give your product away for free.

• Will Apple use some of its huge cash hoard to raise its dividend? Possibly. Will it also do more stock buybacks? I hope not — its a colossal waste of money to anyone except Wall Street financial engineers.

• Despite what Lawrence Haverty of Gamco claimed, it is not the responsibility of any publicly traded company to help Hedge funds have a good quarter. Neither is it any publicly traded firm’s responsibility to use its capital to goose the stock short term for the benefit of this community. (Only an ass would say that).

• CEO Tim Cook is an excellent operator and executor. Don’t blame him for not being Steve Jobs — NO ONE IS.

• In the 2,000s, Apple’s P/E ratio was high — but so was its revenue and earnings growth rate. Today, its P/E is much lower — but so to are its revenue and earnings growth rate

• Its been 7 months since the last introduction of a new Apple product. We used to wait years between product introductions, and now 2 quarters is too long.

• Apple has always been a Software company that sold Hardware — but Wall Street has fialed to understand that. It is not, per the WSJ, an identity crisis.

• Wall Street has a long history of not understanding Apple. Amazingly, most of the street still seems to not get it. (See: Analysts Still Underestimate Apple: Sell-siders simply don’t ‘get’ Steve Jobs’ company from 2005 based on this post: Wall Street Remains Clueless as Ever as to Apple’s Products)

• Apple’s app universe is enormous and vastly superior to their competitors.

• When I suggested selling or hedging Apple positions, it was due to many of these technical and quantitative factors. I put a $500, then a $350 downside target on the stock, which had gotten way ahead off itself. The key for traders is managing their position.

• Investors need to understand the difference between a company and its stock price. They are not the same thing. The valuation is a function of the firm’s growth rate and profits. Sometimes a stock gets mispriced relative to these factors.

• Traders never seem to care — if its going up and they are long, they like it. When it stops going up and they are long, they cut and run. This is how it has always been.

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