CymorFund Investment Newsletter Stock Picks recommended shorting Apple (AAPL) on May 2, 2013 at $439.70. It is time to close that trade. Buy Apple today at $430.31.
We Have a Profit
That is a modest profit of 2.15% but it is a profit. Better to take a profit than fight the trend.
Technical View
We think Apple still has a large downside and those that are risk takers may consider holding the position. Apple from a technical perspective has had a double bottom – that is it fell to slightly under $400 twice recently but didn’t break through that base. Instead it bounced higher off that double bottom. That is a strong technical signal and not to be ignored.
There is another technical danger. After a stock gaps up or down, it tends to often retrace and cover that gap. Apple gapped down in January 2013 and it is in position to rise and fill that gap. From a logical point of view, it doesn’t seem realistic, but from a history lesson, it has often happened in similar situations. If it does cover that gap, we will lose our advantage,
Market View
We think that Apple’s position is being eroded as their manufacturing costs escalate and their margin shrinks. The latest gossip is that they intend to bring out a cheaper model of the iPhone to complete in lower priced markets. That should erode their margins but probably needs to be done to hold market share.
We think the stock is still overpriced, but there is an old adage – You Can’t Fight the Market. You can be correct in your view and hold that correct view until the market exhausts you, or you can take a small profit and use your capital to go with the market rather than against the market. The risk/reward profit says “Buy Back the Short Now’.
Our original Recommendation of May 2, 2013 follows:
Apple Computer (AAPL) Has Had its day.
When Apple was at $676.00, we suggested buying Put Options. It seemed that several factors were in play and market exuberance was pushing Apple higher, without a supporting rationale. Apple eventually peaked a touch over $700, but then quickly returned to earth. That call made a lot of money.
Sell Apple Inc (AAPL Nasdaq) (Recommended sell at $439.70)
Apple hit a high last fall of $705, which defied gravity. It has since been on a trending down-slope with the $400 level broken and Apple sliding to a new low of $385. Yesterday it rebounded on the news of a proposed dividend to shareholders and a massive financing at today’s low interest rates to fund the dividend and share buybacks.
Why APPLE Had to Falter
The first and most obvious factor was that Steve Jobs, the genius who rescued Apple, was no longer there. When a determined, resourceful and visionary genius is no longer at the helm, it is hard to replace him. Who would be willing to work in the shadow of a great man, except a lesser man? Can you imagine Steve Jobs living under the direction of another leader? He could not, and did not, which is why he left his previous engagements to do his own thing. He could not be replaced by someone already working at Apple, because no-one with that level of intellect and drive would stay and follow someone else’s orders. So his replacement is not the same as the man he replaced.
Every Revolution Fades With Time
Apple created a computer that was revolutionary, and it set the standard. Others followed. Then Apple created the iPad, and others followed, then the iPhone. Each product drove the company to new heights and created awareness in the world. It’s hard to keep revolutionizing the world. Eventually the mantle passes. As the pipeline of products created by Jobs reaches the market, the number of new revolutionary products following is thinning out.
Apple Has Too Much Money Offshore
US tax law (see my blog of October 14, 2012) is written in strange way. American multinational companies span the globe and make tremendous profits around the globe. However these profits stay offshore and are not repatriated, because to bring the money back to the USA would involve paying a repatriation tax. So the money stays away from the USA. Apple has over $102 billion of cash in offshore subsidiaries. To bring this cash back to the USA would involve paying repatriation taxes. So Apple has decided on another route. They intend to give over $55 billion back to shareholders through 2015, as well as buying back shares. They think this will attract investors who are looking for yield and a share price stability.
However Apple doesn’t have enough money in the USA to comfortably fund these two goals of share buybacks and dividends to shareholders. So rather than repatriate the money, pay the repatriation taxes, and then pay the reduced amount to shareholders, Apple is embarking on one of the largest bond issuances in history with staggered due dates that extend far into the future. This is a good policy in that it avoids any massive call at one time for repayment of the debt, and does lock in the low interest rates for extended periods of time. On the other hand, it is pure folly. In 2 or 3 years, Apple will still have the repatriation tax issue hanging over its head, and in addition will have this enormous new debt to repay. Does anyone remember what happens when a company has less cash than it needs to repay its creditors? It is a foolish short term thinking solution. Steve Jobs has to be turning in his grave.
Perhaps Apple intends to bring out a new and revolutionary product that will carry on the glory years. Can anyone tell me what it is?. Perhaps a TV revolution, or eyeglasses that automatically connect the wearer to the internet, or the Dick Tracy watch? Unfortunately Google is already a competitor as is Samsung and others, in researching these products. So in a competitive marketplace, Apple must make sufficient money from new products to fund these enormous dividends and buybacks, or else it finds itself needing to repatriate these offshore dollars.
Competition is Growing Rapidly
Google is invading Apple territory. Google is bringing a core part of its Android operating system in direct competition with Apple. It is a feature called Google Now and is a downloadable app for Apple devices. Apple’s proprietary advantage of controlling its users is about to be challenged. So invaders are on every side, and Apple’s defense is to take a debtless company and bring on massive debt to support its share price. Debt should only be incurred to create value, to create products, or to move forward, This is moving in the opposite direction. A company succeeds not because it has the best product, or the best anything, except the best management. Excellent management uses the assets and position of the company to steer a course that brings success. That is what Jobs did when he returned to Apple. If you judge Apple’s management today, you must judge it on the folly of its current decisions.
Sell Apple or buy Option Puts. Use today’s jump in market price which occurred as a result of the current bond announcement to take advantage of this temporary rise in stock value.
We may or may not have positions in the securities we name. In making an investment decision numerous factors must be considered including portfolio balancing, timing, cash and capital reserves, asset allocation and other factors. Readers are strongly advised to do their own research. Matters discussed contain forward-looking statements that are subject to risks and uncertainties and actual results may differ materially from any future results, performance or achievements expressed or implied.
Views expressed are opinions and not investment advice. Persons investing should retain a licensed professional to guide them and not rely on the opinions expressed herein. This report is neither a solicitation nor a recommendation to buy or sell securities. We are not a registered investment advisor nor a broker-dealer. The information contained herein is based on sources which we believe reliable but is not guaranteed as being accurate or a complete statement or summary of the available data.
