Apple (AAPL) Has Had its Day

Whats-Hot-or-Not
Periodically we publish our stock pick. Stocks that we like are “Hot” and listed below. Stocks not considered hot are removed.
Apple Computer (AAPL) Has Had its day.

Apple Falling
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 under ‘Whats-Hot-or-Not’. Whether an investment is made in a particular security depends on many factors, including portfolio balancing, timing, cash and capital reserves, asset allocation and numerous other factors. Readers are advised to do their own research and decide in light of their own circumstances. Matters discussed contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied.

The views expressed are opinions and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds. This report is for information purposes only, and is neither a solicitation nor recommendation to buy or sell, nor an offer to buy or sell securities. We are not a registered investment advisor nor a broker-dealer in any jurisdiction. The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of the available data.

By Larry Cyna

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and continues as a strategic consultant to selected clientele. He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC’s with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section. He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder’s Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants. He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm. Mr. Cyna is well known in the Canadian Investing community. He is invited to, and attends presentations given by public companies usually 3 or 4 times each week. These presentations are intended by the various hosting companies to present their inside story to sophisticated parties and Investment Managers for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being a part of this keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.

2 comments

  1. In your first paragraph:

    “That call made a lot of money”

    Kind of an inverse pun? (It was a “put” that made a lot of money – hehe)

    We were too skittish to reco a sell on AAPL when everyone else it seemed was calling for $1000/sh (like they are now with Google), but we have done just a teenie bit of bottom fishing in the low $400’s thinking the selling may be overdone.

    Best,
    Roger

    1. Hi Roger,
      We all go thru the same type of thought process. However when I look at the the erosion of their market share in smart phones, & apps, and then I see the attacks on all sides from companies trying to gain music devotees, combined with Google and Microsoft’s advancements, I think that AAPL days of being traded at lofty p/e’s are numbered. When management then does dumb moves, I think they are headed lower.
      Interesting to talk about it.
      Regards
      Larry

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