Key Learnings From The Icahn Effect

Aug.15.13 | About: Apple Inc. (AAPL)

It has been quite a week if you are an Apple (NASDAQ:AAPL) follower. Price swings in AAPL are not uncommon. What is uncommon is to have pricing move so aggressively on so little real news. A tweet from Carl Icahn triggered a three-day upswing that resulted in an astounding share price appreciation to over $500. Any one-day $25 change in share price deserves a thoughtful review. Many readers of Seeking Alpha are Apple followers. It has been a rough ride lately, but with the share buyback and dividend adjustments, as well as better than expected iPhone sales last quarter, things were looking up on a fundamental level. When prices started to climb, I immediately started researching to find the catalyst. Was it a new product announcement? Was it an unexpected acquisition? Did the dividend get a boost? No, Carl Icahn tweeted that he had a nice talk with Tim Cook and increased his position. I kept looking for other reasons to explain the exploding share price but that was it. No other news. After my laughter subsided, the challenge lay ahead -- how to profit from this situation and learn.

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From a tactical perspective, I am long Apple so selling shares on the short-term upswing was not a desirable option. To profit from the upswing, I sold calls to open positions with a strike of $750 for January 2015. The premium collected was $11.66, or $1166.00 per 100 shares. Those calls are now up 5.25%. I plan on keeping them in play and am willing to let shares go at the strike price if it gets there by January 2015. My other alternative is to buy them back if AAPL pricing decreases significantly. A range of 50% gains or greater is my target on the premium. This means I intend to keep half of the $1166.00 collected from the "Icahn effect."

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The key learnings from this episode were not as straightforward. As an ardent follower and investor in Apple, I found it quite odd that such little news could move the stock of such a well-known and large company. If it were not real money, it would be funny. It's not funny. This episode did not contribute any data. Data points I track include general market opinions, bond pricing, interest rates on the 10-year treasury, comments from the Fed and global macro economic events. I do not track tweets.

What I learned:

  1. There is more pent-up demand for AAPL at higher pricing than anticipated. This is good for long positions and an interesting divergence from media opinion. It seems that there were plenty of followers willing to buy shares at increasingly higher prices.
  2. Institutional investors don't know what to do with cash. I assume that buying Apple on short notice was funded from cash. Since there was such an inflow during the day as prices escalated, I conclude that institutions don't have a plan for cash. This is positive for AAPL due to its low P/E, dividend and cash on the balance sheet. If these buyers were willing to commit on zero change in data or the Apple business, I can only imagine what they are capable of on real news.
  3. With the stock market near all-time highs and the bond market in decline, there are fewer options for investors hunting for value.
  4. Dividends and stock buyback plans are positive catalysts for even the largest of companies. I am not a fan of stock buyback programs. I would rather see a dividend increased or a one-time special dividend issued. You can invest in your company in many ways that are more accretive to earnings and profitability than buying your own stock. I would rather see acquisitions than stock buyback programs, but the market disagrees.

Looking out a few quarters, the results of the "Icahn Effect" should diminish. I'm sure the Apple board and Tim Cook appreciate the input provided by Mr. Icahn, but I doubt it will cause Apple to alter its plans. But it does serve to set a defined floor to pricing. I am now more comfortable that share prices should not see a decline under $450. It also makes me more comfortable buying additional shares, or selling cash secured puts to accumulate more shares on real news.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.