Seeking Alpha
Special situations, growth at reasonable price, value, micro-cap
Profile| Send Message|
( followers)  

Please continue to own the stock of Apple Inc. (NASDAQ:AAPL). Or don't own it. Whichever is your current situation, please keep it that way, I would argue.

I addressed the unlikelihood that any except, perhaps, the most tech-savvy individual investor could reasonably expect to outperform the market with AAPL in a Seeking Alpha article titled Apple Fell To Earth And Now It's Time To Seek Alpha Elsewhere. This was published on March 18; being a Monday, it was written at AAPL's March 15 closing price of $444. Now AAPL is a couple of percent lower than that even though the stock averages have surged from one high to another.

That article contained two messages, one of which I want to reassert and rephrase in this article, and one of which I want to alter in view of the continued underperformance of AAPL versus the market, which I am guessing has gone far enough - at least based on what's publicly known.

First, I'd like to specifically apply the Efficient Market Hypothesis to AAPL, even though overall I am not a fan of the EMH. I do this with the following history. About 10-11 years ago, I became aware that my family was going through a lot of music players called iPods. Why they kept breaking so often, I didn't know, and why the Apple store in the mall a few miles away was always crowded whenever I passed it, I also didn't know. One thing I knew was that AAPL was an expensive stock based on P/E and price:sales criteria, and the iPod that was liked by the younger generation was basically a poorly-made product that could be subjected to major competition.

I never seriously thought of buying AAPL until the iPhone came out in mid-2007 (I bought one the first week it came out). But by then I was getting out of stocks entirely. So I got into AAPL right around its pre-crash high in the $200 range in January 2010, after the iPad release was announced. At that point, there was relatively little serious institutional money in the stock. The general image of the company on the Street was that it was a hit-driven company with a checkered past, a sick CEO, an unpredictable future, etc. Certainly, it was felt, Microsoft (NASDAQ:MSFT) was a much more solid company, given its legal monopoly in the software running the world's PC's. Apple, in contrast, was viewed almost as a toy company.

That and subsequent months were the period in which AAPL emerged quietly (from a Wall Street standpoint). Wall Street could, had it wanted, bid the stock straight up once it saw that Apple had yet another monster hit with the iPad, and was way ahead of the competition. Here was a debt-free company with products that were transforming the way people communicated and calculated. I didn't rely on my views alone in believing this and investing on that belief. Mainstream rating services, namely Value Line and Standard & Poor's, believed that AAPL's valuation was far too low given reasonable growth expectations.

That was a time, with the stock in the $240-260 range in mid-summer 2010 and a little beyond that, when I would argue that Mr. Market was inefficient with AAPL shares. The consensus simply was not able to shift as fast as Apple was spearheading a new paradigm.

AAPL has gone through two discrete phases since that period of blast-off around $250/share. The first was excitement leading, eventually, to over-excitement beginning with the December 2011 quarter (Apple's Q1), reported in January 2012. That wonderful earnings report sent AAPL up ultimately a quick $200 B in market cap, and the Nasdaq followed with a record 12 straight up weeks (if memory serves). And that was it. The new iPad drew lines but was not revolutionary, though the Retina Display was cool - but we had already seen it on the iPhone. Q2 did not beat the Street on sales, and only beat on earnings due to massive one-time margin expansion. Then the bottom started falling out of the fundamentals from the standpoint of even matching expectations, much less beating them. Q3 was a solid miss on both sales and earnings. China was a disaster, coming in far below expectations.

This period marked the beginning of froth in Apple's shares. It began, I believe, when the stock started shooting up promptly after those disappointing Q3 earnings reported in late July led to a one or two day sell-off in the shares. The "excuse" for the furious rally was the new iPhone was indeed going to be announced in September. But when it was not revolutionary - "merely" a truly fine phone - some bloom came off the AAPL rose. When the Apple Maps problems became heavily publicized, all of a sudden mighty Apple had struck out from Wall Street's standpoint. Maps are the only mission-critical function for a smartphone for most people. Where was Google Maps? And, people began to worry, maybe the unit growth that Android devices showed was not really limited to the low end.

The stock promptly headed south, and I believe that it has finally crashed to a level, and has stayed there long enough, that all the froth is out of the stock. Everyone (almost) is realistic. Yahoo Finance reports 46 analysts provide estimates for Apple's earnings. Uncountable more professionals have their own guesses and buy-sell entry-exit points. Then there are vast numbers of informed amateurs who may understand Apple as well as the pros, such as on the Braeburn Forum, where I am a moderator. Then there are the different technicians who make a lot of money opining on AAPL's chart. Then, of course, there are the many contacts in the Apple supply chain who watch all things Apple like the proverbial hawks. To top it off, Tim Cook, Apple's CEO, has been attempting to "double down" on secrecy - and this was one secretive company previously. So one person's guess is as good as another's on what happens next.

Thus I ask you: now that AAPL has crashed and come down to earth, and everybody who follows it knows that it has a massive amount of cash and great products but has competition, how is it realistic to imagine that any of us can expect to achieve outperformance by trading in this equity? (The same would go to options strategies.) The best hedge funds, institutions, private money managers, Silicon Valley insiders, etc. are all competing in this stock. The weekly options are designed to further pad Wall Street's profits.

AAPL has reached the acceptance stage. It was hot as can be when the markets were still cheap post-crash (2010), it stayed hot, it got overheated, it fell toward some reasonable estimate of fair value. The stock's price may rise, fall, rise some more, and you may be lucky with it, but it's hard to see that anybody has any reason to expect an edge playing this from either the long side or the short side. What will be, will be.

Research into much less-studied stocks the market caps of which are too small to attract so much attention is likely to provide more alpha, either from the long side (my only interest) or from the short side.

The second point I want to make is to update the emphasis I placed in the prior article on Apple's problems. This is because of the continued underperformance of AAPL versus the market. All companies have problems. Only one company was lucky enough to have had Steve Jobs co-found it and return to guide it to the amazing success it achieved. In that article, I made the above argument and also suggested that I was bearish on the stock. Now that earnings estimates keep ratcheting down for this and the next fiscal year, the bar has been set fairly low. Apple makes great products. They are differentiated and not unreasonably priced. The pipeline is unknown and could be great. So I would emphasize the point I made in my other Seeking Alpha article on Apple, Is Apple Moving Toward Safe Haven Status Within A Long-Term Trading Range?

I think that if the general stock market ever stops going up (that could actually happen), and if AAPL remains at its current level and has no nasty downside surprise in its upcoming earnings report, its many strengths may lead it to rise in price counter to the market averages. It simply looks cheap and its staying power and great brand name are unquestionable. None of its competitors have even one superman running the show. They will all have their hits and errors. One reason I think the trading range hypothesis makes sense (rather than a run to new highs) is that there is almost no short interest in AAPL, despite the howls of many who lost money in it over the past half year. So it lacks the catalyst that Netflix (NASDAQ:NFLX) had some months ago, and that First Solar (NASDAQ:FSLR) had just this week, namely a short squeeze. It may take a major disruptive new product or a major downside surprise to move Apple from a trading range.

Right now, the Street may have finally categorized AAPL properly, based on what it knows.

AAPL has fallen to earth. It is not close to being a Ben Graham value stock yet, because earnings have risen so fast over the past 5-10 years. But it is reasonably valued and even Apple management cannot have a clear idea of how much money the company will earn 3-5 years from now, or whether a competitor may disrupt their ecosystem in unforeseeable ways.

Thus, while I'm not an investment or financial professional or an adviser, I'm writing this to urge readers that it is only logical to try to outperform the stock market by becoming expert in less "exciting," less well-analyzed stocks. AAPL was hot stuff, now it's much more like an old hat or a comfortable, broken-in pair of shoes. The company has done utterly amazing things, but we all knew that some time ago. On its own merits, there's no reason to think that Mr. Market is misjudging the future stream of dividends that will emanate from this company any more or less than it is or is not misjudging that of the average stock.

I'm "researching different," and hope you do the same.

Source: Why Most People Should Neither Trade Nor Try To Analyze Apple's Stock