Seeking Alpha
Long/short equity, deep value, special situations, contrarian
Profile| Send Message|
( followers)  

Please take note of the following two rules:

    Rule No1 - The market is always right

    Rule No2 - When in doubt, look at rule number one

The problem with the market and with stocks in general, is that they never behave the way you want them to. Yes there are many formulas that help us decipher what stocks might be worth, but as the case of Apple (AAPL) proved recently, while the whole world was gun-ho on Apple at $700, the market proved everyone wrong.

The question is why has the market proved everyone wrong and how can so many analysts be wrong? This question is very important, because only when we have a clear understanding of why the market pulled a fast one on everyone, do we have a chance to begin to guess where Apple's stock might go next and capitalize on its future trajectory.

But since most analysts were wrong, this also means we have to use outside-the-box thinking. Because if we use conventional thinking, then we will agree with most analysts that so far have been wrong, and thus go against the market. And one of the secrets to success in this game is not to go against the market.

So let's start with some outside-the-box thinking about Apple.

Is there such thing as too big of a market cap company?

This is a question I raised recently (here). From an investment perspective it makes little sense, but in reality, the bigger a company is, the more money the stock needs to go up.

Is there a limit to how high a stock can go, irrespective of profits and cash in the bank? Theoretically the answer should be no, but when a company has such a high market cap like Apple does, then we need to think outside the box.

Think of this. Suppose that every fund in the U.S. has a position in Apple. Also assume that the maximum position that each fund can have in any security is 5%. So if Apple's market cap reaches such a point where all the funds invested in Apple reached that limit, then who's left to buy?

Is there a chance that there is not enough money to go around in order for Apple's stock to go up?

Growth is out, value remains

It is probably safe to say that aggressive growth investors (such as those in the SaaS space who buy Workday (WDAY), the biggest bubble of all time) have probably left the stock. If that's the case, then those that have remained are value investors. But value investors don't really care much about appreciation. As long as they perceive there is value (and there is value in Apple no doubt) and they receive a satisfactory dividend, they really don't care much if the stock goes up.

But if that's the case, what must be done in order for more aggressive growth investors to come back in Apple and bid up the stock? The answer is that Apple must return to high growth. But that is probably not going to happen anytime soon, unless Apple comes up with a new revolutionary gadget.

The new iWatch is a good idea, but will it be revolutionary enough in order for Apple to return to the high growth rates of yesteryear? I think the market doesn't think so. If the market thought otherwise, Apple's stock would not be at these levels.

The king is gone but he is not forgotten

I think everyone agrees that Steve Jobs played a big part in Apple's success. Might is be that part of Apple's stock price had to do with Steve Jobs himself? While the iPhone was the brainchild of Steve Jobs, can we credit him alone with the success of it?

I don't think Steve Jobs was the reason Apple is an innovative company and I don't think that we can credit him with Apple's innovative spirits. But one thing I know for sure, Tim Cook is no Steve Jobs - at least not yet anyway.

Too much of a good thing

Is Apple's stock suffering from a case of too much dependence on the iPhone? Anytime a company over depends on any individual product, it is only natural for the market to put a discount on the stock. However, I doubt that this is the case in Apple. Let's not forget that it is the iPhone that has made Apple the biggest company in the world. How can one put a discount on a product that made Apple what it is? But again, it makes no difference what I think, the market seems to think so. And the reason the market thinks so, is because it has marked down Apple's stock to where it is today.

Too much of a good thing (II)

The concept of Apple having too much cash is ridiculous. If Apple didn't have all that cash, would it be worth more? If it gives out a special dividend, does this mean the stock will go up? If the ratio return on assets was higher, would the stock be at higher levels?

There is no such thing as having too much cash on the balance sheet, there is only not having enough. So I don't think that having too much cash has anything to do with Apple's correction. Having said that however, the stock's correction can be perceived as a market blackmail tactic towards management, to give the cash back to shareholders in some form.

The new kids on the block

Until two years ago Apple was basically playing by itself in the smartphone space. But the last two years Samsung (OTC:SSNLF) has become the king of the hill. So if just one company can cause such havoc to Apple's growth prospects, imagine what would happen if two additional companies enter Apple's space.

Nokia (NOK) and BlackBerry (BBRY) just introduced two smartphones -- the Z10 and the Lumia 920 -- that will compete directly with Apple' iPhone.

My question to you is this:

Suppose that for 2013, Nokia and BlackBerry sell 15 million high end smartphones each (a very conservative number I think). From whom will they take market share from? In North America, Nokia and BlackBerry will take market share from Apple. They will also take a small piece from Samsung, but the main loser from these two new players in the high-end space will be Apple. I doesn't matter if Nokia and BlackBerry will be successful or not as companies - Apple will lose business to these companies either way.

But it's not only Nokia and BlackBerry that Apple has to worry about, Sony (SNE) will soon roll out its new flagship phone the Xperia Z that will give everyone a run for their money, including Samsung.

A broken chart

It does not matter what you think about technical analysis, but I think we can all agree that market price action tells us a lot about a stock. I think we might also agree that when the long-term upward trend-line on a chart is broken, it might also mean that the long term growth dynamics of a company (and prospects) have changed. A such, the chart below is an indication that the returns investors had come to expect from Apple all these years are over.


(Click to enlarge)

Bottom line

Apple's stock could trade at $400 or $800 and analysts could make a case to justify the price at either end. Today however, most analysts have lowered their target price, not because much has changed in Apple, but because the market has forced them to change their prospective because of the stock's correction. As such, using non-conventional thinking in Apple's case is warranted, because as I see it, conventional thinking has not worked.

One thing however I am sure of ,and I have said it all along (here and here), is that Apple is no longer a long term buy and hold stock. Apple has turned into a dog stock and is only good for swing trading or if you are interested in the dividend. Until such time comes that the company produces the next big thing, and growth (or the prospect of growth) returns to what it was several years ago, Apple's stock will simply go up and down and will not reward long term buy and hold investors.

And while Apple is cheap by the valuation metrics of a few years ago, today we find a whole host of stocks that are also cheap by the same metrics. In other words, there is some kind of radical shift (as I see it) in how the market is valuing stocks today. I don't have the answer as to why this is happening or what these new market valuations metrics are, just that it is happening. As such, I don't think that we can rely 100% on classical fundamental analysis to try to determine Apple's valuation like we did in the past.

In the end, and no matter what analysts say, the market always has the last word. And the key to success in this game is to follow the market. But if the market is telling something different than what conventional wisdom is, then we have to change the way we think. In Apple's case, I think that requires outside the box logic.

And if you ask me what I think the market is telling us about Apple today (besides being a dog stock), it is that investors need to be very cautious when buying Apple, even on a short term time frame.

Source: Outside Of The Box Logic And Why Apple Might Still Not Be A Buy