Apple and Google: Changing My Mind

I sold all of my Google (GOOG) and Apple (AAPL) stock recently and explained that I was selling Apple because I felt that Jobs and Apple's PR were lying to shareholders about Jobs' health (they were). I explained that I was selling Google because I was getting conflicting signals about the health of their core keyword advertising business and wanted to see some actual results. I sold Apple at $91.36 and Google at $330.

This week we got earnings from both Apple and Google. And I thought I'd talk a bit about what we learned.

Apple had a killer quarter. They surpassed $10bn in quarterly revenue for the first time and had net income of $1.6bn. Macbooks did great and so did the iPod and iPhone franchises. This is a company that is firing on all cylinders and beating the competition in every market they are in. And yet the company carries a market value of less than $80bn. When you take out the cash of $25bn, the company has an enteprise value of $55bn. That is something like 7x EBITDA for probably the best franchise in the computer hardware and CE business. So on fundamentals, Apple is a screaming buy and I'd be buying it if it were not for the fact that I am very uncomfortable with Apple's lack of transparency on key issues like options backdating and the CEO's health. So I'll stay on the sidelines on this one.

Google's quarter was not "killer" but they did well enough to calm a lot of fears on the street. Gross revenue, before rev share with partners, rose 18% over the fourth quarter of 2007 to $5.7bn and earnings before one time charges were about $1.5bn, also up about 20% from the fourth quarter of 2007. I've felt that Google's core CPC keyword ad business is fairly recession proof and these results certainly indicate that there is validity to that view. That said, this year will be tough for Google. But they have a lot of excess cost that they have just started to take a look at and I think they'll be able to grow earnings throughout the downturn with a combination of revenue initiatives and continued cost cutting.

I'd like to get back into Google at the right price. If think anytime you can buy Google below $300, you have to do that. I'll put some orders in this morning to do just that. I'd also like to try selling some puts on Google and I'd love some advice in the comments about the best strategy for that.

Comments

[dandyapple:]

Fred!

Buy some Apple. You'll be glad you did! Remember, no guts, no glory!

Jan 23 03:01 PM

[question ur...:]

Besides the "lack of transparency" - please explain to me how the options backdating issue will have an effect on bottom line and 'value'. Isnt the value of a stock based on it's profitabilty (no doubt they are quite profitable) and the outlook for the future. And the options backdating affecst that how? As to the Apples mis-handling of information on Job's health - why don't we just assume he's not there anymore (and he's not for now) and move on and focus on their operating successes?

Jan 23 03:04 PM

[Andy Singh:]

I bought Google at $700 and Apple at $186. Unfortunately I bought just before they crashed (live and learn), but I believe in the long term outlook for the best 2 tech companies. Still holding on and perhaps get some more.

Jan 23 03:06 PM

[question ur...:]

I too own AAPL in the $180's and agree with you on their long term success. I've resisted selling into the overall market crash and don't deceive myself that it could be some time before I'm back in the $ - but I'm convinced that time will come (eventually)


On Jan 23 03:06 PM Andy Singh wrote:

> I bought Google at $700 and Apple at $186. Unfortunately I bought
> just before they crashed (live and learn), but I believe in the long
> term outlook for the best 2 tech companies. Still holding on and
> perhaps get some more.

Jan 23 03:09 PM

[Offgrid:]

Out of the two I also like Google better.

Jan 23 03:18 PM

[jmmx:]

I quit reading at: "...because I felt that Jobs and Apple's PR were lying to shareholders about Jobs' health (they were). "

Did it ever occur to you that just possibly things WERE changing in the same course of time as Jobs's health issues were reported?

You are making the rather absurd suggestion that Jobs had a health issue so serious that he needed to take a leave of absence, and that he went on for some months doing nothing about it just so he could deceive you.

Your arrogance is really overwhelming.

Like I said - I just quit reading.

Jan 23 03:22 PM

[disposablei...:]

When you say revenue of $10bn, and income of $1.6bn, of course that's just the GAAP numbers. If you account for the full value of iPhone sales (which are accounted for over 8 quarters, but banked in real time), Apple's numbers are even better than they look. Last I heard, at the end of last quarter they had over $28bn in the bank.

Jan 23 03:38 PM

[Echo To All:]

I don't know if this is the best strategy, but it has worked for me very well...

i'm a chart guy, so i think i have a good understanding when an equity is really oversold. And when the oversold condition is near a price I am willing to pay for the stock, I sell the puts at a strike I am willing to buy the stock.

For instance with at the moment with GOOG, it is not oversold, and it is hitting the 85sma resistance.

once oversold sell ur puts (or its at a level ur willing to pay for the stock). I stick with short-term options when selling (to benefit from time decay), so I would use the March puts. Assume ur buy price of GOOG is 290. Sell the 280 March Puts. If a hedge is desired, sell the 330 March calls (or a strike your comfortable with, that will not exercise and can provide a hedge)

being a chartist I would (and have) purchased puts (330 march) today, as it reached the 85sma resistance, and when (if) it approaches the target price of 290 with an oversold condition, sell the 280 puts. (possibly keeping the purchased puts as a hedge to the sold puts)

(I primarily use my charts to dictate when to enter/exit, and utilize options based on my understanding of the charts. so i may not be giving the best option strategy via strike prices versus stock price.)

hope this helps

Jan 23 03:49 PM

[Bill Youngs:]

Fred, YOU DO NOT KNOW that Apple was "lying" about Steve Jobs's health -- medical diagnosis is not an exact science, diagnoses do change from day to day and from doctor to doctor -- sometimes gradually, sometimes abruptly. WHAT WE DO KNOW is that for many years Steve Jobs has charged Apple only a dollar per year for his work and that despite the recession, Apple just turned in its best quarter in history.

Jan 23 04:03 PM

[oljoey:]

At the current price levels you'd be crazy not to buy Apple. The company made money in one of the worst market environments of the last century. Once the current market storm is over their stock will scream. Google will too... So put cash in both and watch it grow over the next 5 years.

Jan 23 04:31 PM

[Anonymous W...:]

You are right about Apple's great value. Pound for pound I like Apple over Google. You are totally incorrect about SJ and Apple PR deceit over SJ's health issues. The fact is that even SJ himself didn't know exactly what his health issues were. Sometimes it takes time to figure out and understand what's going on medically and so all is in flux. Hormonal imbalances can be tricky even once recognized as a health issue. So how can you expect the Apple Board & PR to know when SJ doesn't really know himself as he pursues his own personal due diligence with his Doctors ? The fact that SJ was able to do so much at Apple with all the rigor and demands speaks to that as well. It was not some obvious incapable sickly person here that the Apple Board carried on its back to strike the deals and deliver product strategy. Hey, if you feel uncomfortable or squeamish about buying Apple, maybe you should just buy a really safe utility stock or something. But don't try to coach us with any authority.

Jan 23 04:33 PM

[tony not toni:]

A not so humble apology from a humble guy.
The fact is that most analysts, with their fancy charts and deep analysis, always seem to miss on Apple's tremendous success. The only reason the stock is way below it's true value can't be explained by charts or analysis. It's due to the current economic crisis and rumors driven fears fed by dubious analysts who profit from shorting Apple's stock. The fact is every quarter Apple blows away all expectations, simply because it's a great company selling great products that people can't get enough of. People, including myself, are sick of Microsoft's lousy "Windows", and are shifting to Macs, which makes Apple a company with great potential. You add to that all the Ipods and Iphones and Itunes downloads, well, you do the math, no charts, no analyis needed.
So Fred, if you want my advise, buy Apple

Jan 23 04:42 PM

[Roger Knights:]

Hi Fred--I've liked your articles. Here's a link to a page on Amazon that lists 4887 (and counting) books on options:

www.amazon.com/s/ref=n...

The book I bought, "Understanding Options" by Michael Sincere, was highly rated by readers (unlike the "for Dummies" book), and costs only $9 used.

I suggest you consider getting into AAPL with call options NOW. I've got a feeling the company may be about to toss their shareholders a bone in the form of a stock buyback program. It may be limited in scope (to only $5 billion, say), but its mere announcement should be enough to boost AAPL into the three-digit range instantly.

Jan 23 05:06 PM

[Red Delicious:]

Speaking of Windows, I was over at Steve's house the other day, snooping around. Considering I have lost over $100k in value since it's peak, I thought I would take a peek. He does have some apple trees on the Waverly side of the house and they look healthy.

Okay, I wasn't really snooping around, but I do have the urge to yell "You the man, Steve!" every time I drive by listening to my ipod on my iphone that I loaded from my MacBook. My faith has blinded me into a loss that will break my heart and wallet. But I still love the iphone.

Jan 23 05:13 PM

[LongAAPL:]

To those that bought into Apple in the $180 range... Years ago, I bought in at $69, it soon went up to around $165 and split. I was on cloud nine for only a short time because it dropped during the telecom bust all the way down to around $13. I felt lucky at the time and tried to lower my basis per share by buying on the way down. I never did buy at the bottom, but now am sitting on about 1200% gain. The lesson learned -- don't try to time Apple stock. Either buy in for the long term based on fundamentals or leave it alone. Set a sell point that you will be happy with and stick with it. I made a lot of money simply by selling half my shares every time it went up by 210%.

Jan 23 06:06 PM

[mike hough:]

"When you take out the cash of $25bn" I think you will find that is $28 bn + (and on target for $40 bn by the year end.)

When you consider that they only put 12.5% of iPhone revenue on the books each quater - that revenue will continue for two years even if they don't sell another iPhone - buying has to be a nobrainer.

Just imagine what will happen when they drop the price on iPhone and/or offer unlocked iPhones, the competition will be toast.

Jan 23 06:29 PM

[j_remington:]

Apple bulls are relying on past performance to justify their cause.

I would not short Apple. But until there is clarity in consumer discretionary I am on the sidelines.

Jan 23 08:23 PM

[Ice:]

Fred: if your interested in GooG under 300 why don't you sell some goog feb 290 puts for $4.90. If goog goes up you made 490 per 1 lot. If goog comes down you effectively bought at 285.10 - which should be a good price for someone who says he want to buy under 300.
Furthermore if you do not get assigned after expiry you sell the March 290.

Jan 24 10:28 AM

[Moon Kil Woong:]

The raw put strategy is typically for the novice looking to get a high degree of leverage because he doesn't have enough money to make a more conservative bet. Traders love to eat these guys up for lunch.

Professionals use options to lower their risk, box their positions, arbitrate, suck premium off their holdings if they intend to sell anyway if the stock rises 5-10%, etc.

I suggest people wanting to play options pick up an options book and start learning a good portion of options trading has to do with the value of volatility and not if the company is good or bad. Volatility is what you're paying in premium for, not if the stock will go up rather than down (although sometimes there's skew, but that's a bit too technical for this reply).

That's why I am more interested reading articles about implied volatility than articles talking about buying or selling raw calls and puts to make money when the stock rises or falls. By and large they are completely missing the point.

Jan 24 12:23 PM

[Ricard:]

Fred,

Thanks for your honesty and candor regarding your investments.

For your objectives, cash-secured put writing seems like it would fit best. $330 June puts (priced around $40 as of Friday) on GOOG would yield around 25-30% annually on your cash while it's waiting for GOOG to dip below $300. If it stays around this price range until expiration, you can either write more puts or buy GOOG outright for net $290. If it falls to around $290 or more, that will probably become your buy price whether you like it or not (seems you like it). If it surges from here, at least you can rest a little easier knowing your cash worked for you. If it drops precipitously...well, you're betting that doesn't happen, right? Your limit order probably wouldn't have saved you either in such a case.

This is just a suggestion - I'm not looking to write puts on GOOG or AAPL...too volatile for my tastes, and both stocks have elements of fad-induced frenzy that I do not like.

ACH and CIEN have similar returns on cash if you write puts, and especially in the case of ACH, it looks like easy money given the long term outlook. CIEN gives you the luxury of receiving a 50% cash return immediately for writing a 2 year LEAP at-the-money.

Jan 24 12:30 PM

[Ricard:]

I'm not sure if I entirely agree with this comment. Covered calls and cash secured puts have very low risk, and in fact carry less risk than owning the stock outright. Neither strategy has anything to do with leverage or low asset base - indeed, you need a relatively high asset base to even consider either of these two strategies. Not only that, both of these strategies do indeed require direction to play in your favor, depending on how in-the-money or out-the-money you write your options, and how much time as well.

Perhaps constructe is referring to naked writing, or buying calls and puts outright, which I entirely agree with. Spreads and straddles indeed are more advanced, and are much less dependent on direction, but I believe that is beyond the scope of what the author is asking for. In this specific scenario, volatility allows for the seller to receive larger premiums than what would otherwise be the normal case, and thereby profit more while waiting for the stock to drop to his buy price. If it never does, he collects a very nice return on his cash.

"...I'm not looking to write puts on GOOG or AAPL...too volatile for my tastes, and both stocks have elements of fad-induced frenzy that I do not like."

To clarify my above comment, I find that I have no idea what GOOG or AAPL will do in the long term, and therefore find the direction to be too volatile for my liking, not the inherent volatility. ACH and CIEN actually have more volatility than GOOG or AAPL, but I am much more comfortable in predicting the direction in the long run due to their severe and IMHO unreasonable contractions. Also, the lower price base limits the downside of writing puts, in case the unimaginable occurs.



On Jan 24 12:23 PM constructe wrote:

> The raw put strategy is typically for the novice looking to get a
> high degree of leverage because he doesn't have enough money to make
> a more conservative bet. Traders love to eat these guys up for lunch.

>
>
> Professionals use options to lower their risk, box their positions,
> arbitrate, suck premium off their holdings if they intend to sell
> anyway if the stock rises 5-10%, etc.
>
> I suggest people wanting to play options pick up an options book
> and start learning a good portion of options trading has to do with
> the value of volatility and not if the company is good or bad. Volatility
> is what you're paying in premium for, not if the stock will go up
> rather than down (although sometimes there's skew, but that's a bit
> too technical for this reply).
>
> That's why I am more interested reading articles about implied volatility
> than articles talking about buying or selling raw calls and puts
> to make money when the stock rises or falls. By and large they are
> completely missing the point.

Jan 24 01:10 PM

[Ricard:]

"Also, the lower price base limits the downside of writing puts, in case the unimaginable occurs."

I'm sorry, strike this line from my last comment. I was overly preoccupied with my 50% return on CIEN, which you generally can't find on more "expensive" stocks. Generally, lower price base doesn't matter much as long as you can write puts with a large premium.

Jan 24 01:18 PM

[CecilTexas:]

Here's my thinking regarding selling naked puts: determine a price that you feel is fair for the stock and you would be willing to buy and hold. Look at the current price and what the puts are selling for at the closest strike to determine the time value you can expect when the underlying gets down to your strike. If the time value is below 10% of the strike price, move out in time to a further strike until you get at least 10% return, maybe even 15% for goog. You can use this time value for setting your limit price on the strike you chose in step one, and you will also have determined which month's puts you need to sell.

Now, if you are bullish, I would seriously consider selling an in-the-money put rather than the out-out-of-the money. If the stock is between strikes, you will get about the same time value, but you will also pick up the intrinsic value as well, assuming the stock rallies to above your strike price. However, I would stick to selling the next strike up (ITM) as you don't want to get too aggressive and you don't want to give up too much time value, the reason you're selling the put in the first place; two strikes up is too aggressive for my tastes.

So, when setting your limit order, take the time value you determined in step 1 above and add about 25% of the width of strikes (ie $2.50 for a $10 strike width). This will require the stock to drop 1/2 a strike width below your desired strike (ie $5 for a $10 strike width) before your limit price is matched (delta of the put will be approx 0.5 around the strike, so 0.5 of 1/2 strike is 25%). Use this as the limit put-price for the strike/month just above the stock-price that you feel is a bottom.

Now, this is an approach that says "wait for the stock to hit your bottom" rather than "take action now." Bear in mind that may not happen, of course. As one commenter mentioned, implied volatility is important, but what you're looking for is a way to buy the stock cheaper, not be an option trader. However, if the stock drops somewhat quickly to your price point, you will be rewarded with higher implied volatility and you may get your trade even before its an ITM strike.

Jan 24 02:48 PM

[Fliujniligui:]

For options, morningstar published recently a report about how to invest in options and how to analyze them, I suggest you go read that. I read it and now I understand how it works but I do not have yet the appeal to invest in options. In fact I did take an option, the one to not play with options hehehe.

I am not shareholder of AAPL and GOOG. I like GOOG over AAPL but I do not like the price of those. Yes they are making a killing in their respective business, but everyone knows it and the share price values it. I try instead to find killer business in technology who have a wide moat, a relevant product pipeline and more importantly, no debt along with a downturn in their sales and earnings who can only be short lived. Those companies I found are trading at depressed levels which are nothing if we think of them as 10 years holdings. These companies are EXFO, NVDA and INTC (and why not GE !!! now everyone blasts it for having done a profit despite the recessive mess we are in?).

AAPL needs INTC and NVDA to sell its stuff. GOOG products needs hardware to be used, so I pay a fraction of future long term earning power and growth to get companies who are anyways linked to GOOG and AAPL To be patient and wait for things to pass, I go on blogs and play computer games with my Core 2 quad and my geforce 8800 GTS who will need a replacement eventually hehehe.

Jan 24 04:51 PM

[Takayama:]

I do not have much confidence in these two companies.
I believe Apple will fall below $40 as the recession deepens and consumers take cover from the storm. Compare with Sony, Hitachi, Toyota and Honda.

Google may be another Satyam or Enron, I fear.
My expectation is its stock price will fall below $180.

Jan 24 10:14 PM

[Takayama:]

I do not have much confidence in these two companies.
I believe Apple will fall below $40 as the recession deepens and consumers take cover from the storm. Compare with Sony, Hitachi, Toyota and Honda.

Google may be another Satyam or Enron, I fear.
My expectation is its stock price will fall below $180.

Jan 24 10:15 PM

[Lonestar1:]

I used to own both and unloaded them before Lehman's fall. If I am sure about the market bottom, I would take up both for short term trading. At this point, it is too early.

From a historical perspective, when a new bull market takes off, the leadership will be an entirely new group. It is quite possible that by then AAPL and GOOG may look like today's CSCO and MSFT.

Jan 24 11:10 PM

[Lonestar1:]

I used to own both and unloaded them before Lehman's fall. If I am sure about the market bottom, I would take up both for short term trading. At this point, it is too early.

From a historical perspective, when a new bull market takes off, the leadership will be an entirely new group. It is quite possible that by then AAPL and GOOG may look like today's CSCO and MSFT.

Jan 24 11:10 PM

[brewer:]

How can anyone be 'sure' about a market bottom? Please.

I like Google too, but Apple is by far the better investment. Success is built into Google, folks are in total denial about Apple. This is going to stop pretty soon. I expect snow leopard will be the last Apple OS that is Mac only, I expect a new iPhone that is free of carrier restrictions, etc...

Jan 26 02:59 PM

[brewer:]

Make that Leopard, not Snow Leopard. I think if the point of Snow Leopard is simplification and tuning, they are also going to want to sell it to the beleagured masses, trying to run Windoze or Linux.

It won't be as good as having a real Mac, but then, it's a PC, that has always been the case.




On Jan 26 02:59 PM brewer wrote:

> How can anyone be 'sure' about a market bottom? Please. <br/>
>
> I like Google too, but Apple is by far the better investment. Success
> is built into Google, folks are in total denial about Apple. This
> is going to stop pretty soon. I expect snow leopard will be the
> last Apple OS that is Mac only, I expect a new iPhone that is free
> of carrier restrictions, etc...
>
>
>
>

Jan 26 03:01 PM

[dsrtwriter:]

I will give Apple a $20 dollar premium over its cash holdings, which would put a buy price in the $45-48 range.In this declining economy, I think that is as generous a premium as you can give.

Jan 26 06:52 PM