By Robert Weinstein
You wouldn't know it by all the negative spin by the media, but Apple (AAPL) doesn't have a problem- investors have a stock problem. Sales reported are strong and growing. Margins are relatively strong considering how many new products were released.
Focusing on slightly lower margins is nonsense because Apple introduced more new products in the last quarter then the comparable quarter. We should expect a small margin reduction. Product startup costs weigh on margins and the seeds take time before the profits can be harvested.
If Cook didn't introduce as many products the media would have jumped on him for that. Oh, wait, they did anyway. It's just nuts how so many people turned on Apple since Steve Jobs left. Meanwhile, the company is executing well beyond any of its peers.
Margins should expand or remain strong after the initial costs of getting the iPad mini and other products to market. Apple is also expected to announce their expansion into new LTE markets this week. As an investor, you can focus on the actual numbers, and why they are moving and what to expect, or you can focus on what the media is pumping out that day.
Keep in mind what our real goal is as investors. Our goal is not, or at least should not be to buy at the very bottom and or try to sell at the very top. There is no question that buying a bottom strokes our ego, but if that's what you want, you may find Vegas more appealing and a better value.
Our real goal is to make money. We don't need to buy at the bottom, and or sell at the top to do so. This includes a bottom from the time we enter into a position also.
As a day trader, I don't often consider the valuation or future prospects of a company I am trading. There's no need to weigh earnings and valuations because on an hour to hour basis, emotion is the primary driving force of any given stock price.
Sometimes, and it's rare, we are offered an opportunity to buy an item for less than what it's worth. I know some will say a stock is only worth what someone else is willing to pay for it, and they are right. But, it's a mistake to confuse a stock with the company it represents.
A company is made up of real estate, personal property, intellectual property, and employees. A stock on the other hand, only represents a slice of ownership in the underlying company. While a company's day to day value rarely changes, shares of ownership in the company can vary greatly on any given day.
Netflix (NFLX) shares increased over 50% in two days off an already strong move higher in the last two months. The company isn't worth 50% more than it was two days ago, and if the stock retraces 10-15% lower, which I believe it will, the company will not be worth any less than today, even though the shares will be.
Those shorting Netflix can tell you about the meaning of a short. Getting caught up with all the other short sellers begging for an exit demonstrates why investors want short sellers in the market. Apple (AAPL) conversely doesn't have a large number of shares shorted.
Compared to Netflix's 20%+, Apple's short interest is last reported at less than 2% of the float. Typically when a stock price gets hammered, and there is a greater proportion of short interest, it's the shorts that step up to cover their positions and lock their results.
If you own Netflix or Apple and you don't like short selling, you may want to reevaluate your opinion. Short sellers are making Netflix investors a lot of money, and we can clearly see how Apple is fairing.
Today, I will take another look near the end of the day for a Netflix swing short, but Netflix isn't what I am focused on. I have focused my attention squarely on Apple during the last few weeks.
The funny thing is that I don't own an Apple product. I'm not a "true believer" and like all of my investing, I couldn't care less about the product. Even without an Apple product, I am very excited about the company right now.
Apple is WHAT we live for as investors. You're seeing it right now and enjoy it because you may only get a dozen "AAPL"s in your life time. There is a reason why investors coined the term "blood on the street" and it isn't because it's "easy" for the general public to buy.
Some were disappointed in Apple's earnings report. As I read the report and watched the stock price action, my thoughts were that Apple would bounce, and bounce hard.
As was pointed out many times in the conference call, Apple finished its best quarter ever after adjusting for the extra week last year. Apple enjoyed greater revenue and earnings per average day in the last reported quarter than any before.
I find it somewhat difficult to reconcile the subsequent fall in share price, but after the many years of watching pigs fly and great companies get pounded into the ground, nothing totally amazes me anymore.
You really want to consider buying Apple here. When buying weakness, I believe selling put options may provide the additional wiggle room desired. I don't see an edge buying call options, so if that is something you're considering, maybe take a pass.
The reason why buying call options are tough is that if you don't time it out almost perfectly, the time decay eats away all or most of your potential profits. The implied volatility of options in a down market increases the premium too much in my opinion.
Don't look at Apple as a trade, consider it as a holding for at least six months. After the storm has passed, the company may be the darling of Wall Street again. As a profit making machine growing revenue in double digits, the media will grow tired of the bear thesis quickly.
I bought Apple at $460.96 and while I could have taken a quick three or four dollars in profit, I am holding for the bigger payday.
Apple is holding about 30% of its market cap in cash. That's a huge amount of cash on a percentage basis. As a retail investor, you can't plan on Apple caring a whole lot about the share price, but you can bet the phones in the C-suites are ringing from large funds and investors that want to see something done soon to calm the market.
If you have the mental discipline to ignore the media, I think you will find Apple may or may not have bottomed, but we are very close. In six months when the media has a new company to kick around, I expect Apple to trade at a more appropriate valuation. I believe Apple will once again trade over $600 (maybe adjusted for a split) within a year.
Disclosure: I am long AAPL.