We all know who the Grinch is. He's the furry green grouch with a genius for spoiling other people's merriment. In the well-known Dr. Seuss story, How the Grinch Stole Christmas, the Grinch gleefully made off with the holiday gifts of an entire town. The Grinch's targets--the hapless and gentle Who's of Whoville--were left waiting for a Christmas that never came.
Let me let you in on a secret. Apple (NASDAQ:AAPL) has a Grinch lingering in the background right now, in the form of continuing speculation about production logjams for its best-selling products. According to a story in The Telegraph, all the display suppliers for Retina iPad Mini are "facing difficulties in reaching production targets." Rhoda Alexander, director of tablet research at IHS, said, "The supply of Retina iPad Mini is going to be ridiculously tight in the fourth quarter."
That's particularly bad news because two of the nation's largest retailers, Target (NYSE:TGT) and Walmart (NYSE:WMT) just reported blowout sales numbers for Apple's new iPads. Reports are also out that Apple's new iPhones and iPads were used to place over 80% of mobile sales on Black Friday. In typical "buy the rumor, sell the news" fashion, the blowout sales are no doubt already priced into Apple's stock. On Black Friday, Apple's stock hit its highest close this year, climbing as much as 2% before closing up 1.85% at $556.07.
What can we expect now? Unfortunately, such strong sales numbers feed speculation about inventory issues. Will Apple's massive supply chain be strong enough to satisfy the holiday frenzy? Or will Apple's holiday party end with a thud?
The iPad Mini went on sale for the Christmas rush and according to Mirror News, "experts are saying customers are going to need to move fast if they want to guarantee the hottest Christmas item out there." The story further reports, "Apple won't have supplies of the iPad Mini 2 sorted out until at least the spring."
If these stories are true, closest rival Samsung (GM:SSNLF) will be able to invade Apple's turf even further with its new tablets, including the Galaxy Note 10.1 2014 Edition, one of the few tablets that costs more than the iPad Air. Meanwhile, Microsoft (NASDAQ:MSFT) is putting on a massive holiday marketing push behind its Surface 2 and Surface Pro, both of which could attract buyers who want access to Microsoft Office applications.
What's an AAPL investor to do? With the Apple rumor-mill shifting into high gear again, could it actually be time to sell? After all, in classic Wall Street fashion, after a two-week tear in which Apple's stock climbed nearly 9%, shares fell with a thud after the company introduced the iPad Air and iPad Mini.
Here's the short answer. First, take these supply chain "shortage" reports with a hefty dose of salt. It's possible they are utter nonsense--it's happened before. Analysts surveying the supply chain of manufacturers in Asia can only reveal a snapshot of the manufacturer's current activity. Relying on that kind of data to make decisions about the value of a stock is not plausible, it's plain dumb.
Second, brace for more "bad" reports, and understand they will have a temporary impact. Unfortunately, when it comes to short-term price action with Apple, it doesn't really matter whether the rumors are dumb, or even if they are completely fabricated. As was proved when Apple's shares tumbled based on ill-founded press stories of iPhone 5C's supposed flop in mid-October, what matters is if they are believed.
The stock market does not move on absolutes, but moves based on the differential between expectations and reality. No stock proves that truism more than the "Cult of Mac"--where Apple product rumors are a mini-industry all their own.
We all need perspective. Emotions and perceptions can play an evil trick and convince us that gloom always has to win. Gene Munster of Piper Jaffray candidly told Bloomberg that when he saw the 9-million number for the launch weekend of iPhone 5, "I basically fell out of my chair." He had expected 5-6 million units.
Here's the takeaway. When it comes to Apple, an emotion-driven reaction to unconfirmed news can make or break your investment. Be careful. Whatever the story might be, whether it's true or not, understanding its effect is crucial.
Think You Can Decipher Rumor from Reality? Good Luck With That
Even the usually reliable Wall Street Journal has made a fool of itself by reporting rumors about Apple as news. In mid-October, the Wall Street Journal was forced to backpedal on an ill-founded story about supposed problems with iPhone 5C's supply chain. The published news story was headlined, "Apple Cuts iPhone 5C Orders." In the story, WSJ reported double-digit supplier cuts at Pegatron and Foxconn. By the end of the day, the WSJ had realized the story was unfounded, changed the publishing headline to, "Apple's Dual iPhone Strategy in Doubt" and shifted the revised story's emphasis entirely.
A parallel report from Reuters on the same day similarly speculated about problems with the iPhone 5C supply chain. But Reuters hedged their bet by cautioning against "reading too much" into supply chain adjustments, which are common in the "fast moving electronics industry."
While most long-term investors consider Apple a rock-solid investment, there's no denying the stock has a large army of haters in the financial media. As Mark Rogowsky pointed out in a September 25 Forbes article, "a lot of the mainstream technology and financial media has a difficult time finding much of anything positive to say about Apple on a day-to-day basis. That's why they write nonsense like, ''Why Record iPhone Sales Might Be Rotten for Apple" at ABC."
It does no good to seek guidance from Apple's management. CEO Tim Cook brought his trademark wooden rhetoric to bear when questioned about supply issues. On October 28th, Cook said, "It's not clear if we'll have enough iPad Minis with retina displays for Christmas." Two days later, he said, "This is going to be an iPad Christmas," as he predicted year-over-year growth.
I'm not going to slap a $1,000 price tag on Apple, as earnings have been flat to down in recent quarters. I think it's fair to say that Apple is going to struggle mightily under Tim Cook to reinvent three entire segments of computing, as it did under Jobs with smartphones, tablets and laptops. It's also true the market for these devices is maturing and getting more competitive every day.
On the other hand, neither am I about to throw in the towel. Analysts on Wall Street believe Apple will grow its earning by more than 14% annually over the coming five years, which is very close to the projected earnings growth for Google (NASDAQ:GOOG). That gives AAPL a lot of room to run, because the search giant is valued more than twice as high relative to earnings as Apple. In addition, there are billions devoted to a buyback that will likely remove another 5% or so from Apple's total outstanding shares.
Despite frequent bouts of volatility, Apple's shares have moved up sharply since touching their 52-week low in April of $385. There are multiple potential catalysts on the horizon, most of which are so over-reported it's not worth repeating them here. But one thing is worth repeating. Apple is the most valuable stock in the world. You have only to look back to December of 1997, to see that you could have bought the stock for $3.32 a share. If you'd missed that chance and merely bought shares in March for $83.11, you'd still have close to a seven times return--far outstripping the Nasdaq.
In the Dr Seuss holiday story, the Grinch returned to Whosville to find a shocking surprise. Instead of his victims gnashing their teeth over their missing presents, they were singing. Stealing their presents had no effect, the Who's went ahead and celebrated anyway. At that point, the Mean One of all time had a last minute, big-hearted turnaround and returned the gifts he had stolen. "'Maybe Christmas,'" the Grinch thought, 'doesn't come from a store. Maybe Christmas...perhaps...means a little bit more.'"
But that's a fairy tale. Or is it?
You place your bet. I'm betting Apple will be able to send the Grinch back to his cave. At least until Apple's first quarter 2014 results come out.
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.