Background: Should fans of the most famous fruit stock ever look out below? Is the former leading high flyer at serious risk of hitting the skids hard, just as gold did about a year ago?
Mostly expressed during my time as moderator on the Apple (NASDAQ:AAPL)-oriented Braeburn forum in 2011 and 2012, I have propounded for the past couple of years the idea that just as gold bullion spiked to around $1900 in August 2011 from much lower prices not long before, rising from obscurity to become immensely popular, so is AAPL positioned to complete its transition from a "toy" company to most famous stock in the world, and then very possibly be punished via a vicious bear market.
This article makes the case that even though AAPL and gold are very different assets, the psychology of becoming the world's favored, hottest investment may lead to similar price action, which could involve a substantial, perhaps 40% crash in AAPL over a short period of time. Of course, "perhaps" means nothing, but Apple's corporate results have been disappointing for quite some time; a tipping point of investor disappointment could lead to a rush for the exits.
Discussion: In the summer of 2012, I swung from a raging AAPL bull to bear. This was due to several factors coming into play at the same time. These factors included a FY Q3 (June quarter) sales slowdown in China, followed by a disastrous set of commercials aired during the London Olympic Games in August. Then came the wild runup due to Apple's win over Samsung (OTC:SSNLF) in an unsettlingly quick decision on multiple complex patent matters in a Silicon Valley courtroom, followed by hype over the latest iPhone release.
My take at that time, as strenuously argued on the Braeburn Forum, was that AAPL had gone too far, too fast. CNBC rocked to an AAPL beat. Globally, lines formed for new product releases. Even a mere new store opening in a major city might be reason for a fluff media piece on Apple. Yet there was trouble in Cupertino.
Steve Jobs was quickly proving irreplaceable. The disaster with the hiring and quick firing of John Browett to be Apple's retail head, to be followed by CEO Tim Cook taking on that extra role, was bad; that few took it as a sign of Mr. Cook's deficiencies as CEO was worse, in my view.
Then, almost inevitably, bad news struck: there were manufacturing problems with the new iPhone, and Apple's map function quickly became a laughingstock; whereas the now-displaced Google (NASDAQ:GOOG) Maps had functioned beautifully as the default map program on the prior iOS. It was also noted that Siri also was a dud for many people. It was further noted that huge numbers of the AAPL faithful were leveraged longs. The knife came down quickly. The drop in AAPL to "unthinkably" low prices slaughtered many retail clients.
Since then we have seen a 50% retracement toward the old high which I interpret as a long-term version of a failed cup-and-handle pattern:
If one overlays AAPL against the leading ETF for the S&P 500 (NYSEARCA:SPY), one sees this for the past two years:
Who would have thought in the spring of 2012, when AAPL was regularly hitting new highs even on days when the general market sold off, that it would have come to that? But so it has. AAPL has been doing what happened to gold after its frenzied peak in 2011. Before discussing Apple's fundamentals and why they suggest much lower stock prices, let's review what happened to gold, for which I use as a proxy the SPDR Gold Shares (NYSEARCA:GLD).
Here is a chart of GLD since its formation:
Seen on this chart, the collapse since the 2011 peak looks less disastrous than a new investor in GLD in the summer of 2011 would think. GLD has roughly tripled in nine years, a yearly return of 13%.
This dovetails nicely with the AAPL phenomenon. Gold went from almost complete investment obscurity in the U.S. to the favorite investment of Americans by summer 2011, according to one poll I reported on at the time (August 2011). As last as perhaps a year or so ago, gold still ranked high on that scale. This sort of enthusiasm is historically problematic. When AAPL was trading around $700 in early fall of 2012, it was valued at about 4% of the entire GDP of the United States and 1% of the GDP of the world. These sorts of numbers have rarely been seen throughout history. They probably applied to Standard Oil at some point pre-break-up (and perhaps with its largest descendant subsequently). Any one company simply has limits, which include politicians if ordinary business competitors cannot do the job.
All this success and fascination primarily from the related products iPhone and iPad. This lack of diversification in a highly competitive marketplace shows the riskiness of AAPL's investment merits. With few if any innovative new products since the iPad was introduced, I think that AAPL has done well to hold above $500, just as in retrospect gold did well to hold about $1500 after spiking to $1900. But AAPL above $500 is not foreordained, especially as it moves to distribute more and more of its operating cash flow back to shareholders rather than retaining it.
Back to gold. As it approached $1900/ounce, many competing financial assets began looking cheap. Gold's surge in price had already taken a lot of disaster scenarios into account.
Both gold and, the next year, AAPL had simply moved to valuation extremes. Note these extremes were not Y2K-style crazy, merely extreme relative to GDP and other measures.
Gold succumbed to its rich valuation, and AAPL has begun to do so.
I suspect the odds are unfavorable for AAPL bulls because of this phenomenon of reversion to the mean.
Back to gold in 2011. Hundreds of dollars an ounce cheaper than the peak, perhaps around $1500/ounce, the media were reporting that young men were substituting other products for a traditional gold ring or band for their intended one. CNBC ran a report out of China showing "investors" say that they knew gold had moved too far, too fast in the $1800/ounce range, but gambling was in their spirit, so they were still buying (speculating).
As happened with AAPL in 2012 into early 2013, various predictions based on past performance and past correlations were used to show that gold was headed into the $2000+ range. Something was going to go wrong in the financial system, it was widely alleged, and whatever that was, gold was the answer. Gold had moved so much that even at much lower prices from the peak, I wrote the following in late September, after GOLD had moved from above $180 to $160 or below:
Gold on Hold; The New Play May Be in Munis
By DoctoRx, on September 25th, 2011
On Monday, Sept. 19, I suggested that the price of gold was vulnerable...
What the gold chart shows is that gold was indeed "on hold". After churning and faking bullish investors out more than once (including myself at least once, I confess), gold showed that the correlation of gold and silver price surges with quantitative easing was perhaps accidental. QE3 came in the fall of 2012, after which gold's price simply collapsed. It "should", after all, have risen, but it collapsed instead. Given the tremendous decade gold had, rising from a depressed $250/ounce in 2001 to around $1900 in 2011, $1500-1600 was suddenly looking like a reasonably-priced support range, but those numbers served only to fool investors.
Will the same fate befall AAPL? Is $500/share a cheap price? An improving economy, the accelerated return of cash to shareholders, the overdue prospect of exciting new products, etc. "should" make the stock attractive around the current price in the $520 range.
As we know, the bullish argument for AAPL is a persuasive one.
AAPL's P/E is below that of the average stock, its finances are superior, it has numerous devoted fans, and its products are arguably all best in class or nearly so.
Yet as I believed was the case with gold hundreds of dollars off its high in September 2011, only one month after the $1900 level was reached, something continues to seem amiss with Apple Inc. and therefore with the stock. The most important point to make is that when Apple pays dividends and buys back stock, those funds are gone forever. Now, if Apple were building real value by introducing an important new product new and then while maintaining most of the value of the older products such as the iPhone and iPad, that loss of cash would be fine. But Apple has clearly begun to resemble an apparel brand: Faded Glory. Retained earnings is a weak spot for this company. Reinvest or suffer is mantra in so much of business, especially in Apple's niches.
Apple is a consumer electronics company. This arena is cutthroat, and there is no special reason that a price:sales ration ex net cash should be in the 2:1 range. It could easily be 1:1, 1:2, or ... you name it.
Apple is in a sense still living off of the amazing legacy of Steve Jobs. Think of the ongoing impact of the '1984' ad, the most famous ad of all time. Or the 'Think different' spots. Yet where are the new great ads? Why does Apple think it will continue to have special appeal to the younger generation?
I'm in a skeptical mood for all these questions.
Thus I am avoiding the stock due to an elevated risk level that a crash or at least continued market underperformance for AAPL is coming. AAPL has, after all, done tremendously over the past half-decade:
On a 5-year basis, AAPL has appreciated about 39% annually, triple that of gold. Long-term AAPL shareholders, of which there are many, remain well-rewarded , though with some degree of disappointment at recent developments. This concern amongst the faithful is an important part of crash psychology. There are a lot of gains to be protected, and a lot of investors for whom a basis in AAPL is much lower than today's price near $520. Thus these investors could get out ahead if they sold in the $400s, or even lower. This sort of great support could crumble if something finally shatters their optimism.
The fundamentals have gone against Apple for some time, at least relative to expectations. As FY 2012 was drawing to a close, minimum expectations on the Braeburn Forum were probably for EPS of $50/share for FY 2013. (I was at $54/share until problems surfaced with the latest iPhone release.) Similarly, the lack of a new QE program in September 2011 dovetailed with disinflationary price pressures out of Europe but continuing economic vigor in the U.S. The economic status of the U.S. was getting better. Gold was to learn that lesson. AAPL may finally learn that missing analysts' expectations quarter after quarter, year after year, can actually have serious consequences. This glittering stock that was all over the airwaves two years ago has become a massive underperformer.
What has come of my prior $54 per share annual earnings for AAPL for FY 2013? Here is some data from Yahoo! Finance showing analysts' expectations for AAPL's earnings:
|EPS Trends||Current Qtr.|
|7 Days Ago||10.18||8.66||42.83||46.24|
|30 Days Ago||10.86||9.01||43.71||47.88|
|60 Days Ago||10.78||9.00||43.53||47.62|
|90 Days Ago||10.78||8.96||43.45||47.80|
This sort of downtrend in earnings expectations is often a poor portent for share price action.
The panic over the U.S. debt downgrade and budget negotiations marked a top for gold. So does the return to a sort of normalcy in the economy mark a return of investment interest to all sorts of parts of the economy, not just a popular glamour stock. Apple has numerous tech and non-tech competitors vying to be the coolest of the cool. Many of these companies have no interest in Apple at all, and some hot areas are hostile, as the following MarketWatch headline shows:
Bitcoin entrepreneurs warn of shift away from Apple products
Hmmm ... Who in 2011 thought of a digital currency as a threat to both Apple (and to gold)?
Apple has become boring, at least to me. It has broken Tim Cook's promise to us from a year ago, and a year and a half ago, that great new products were coming soon. A recent visit to Best Buy showed me how tired Apple's Mac line was versus the various computer designs for the (my view) inferior Windows 8 software. Say it ain't so! Apple stubbornly refuses to produce an iPhone "phablet" (i.e. a truly large smartphone). It is more than four years since Steve Jobs first introduced the iPad. Where's the fresh beef?
Too many investors were mesmerized last decade into 2010-11 by the iDevice juggernaut. They have ignored the history of AAPL after SJ was forced out of the company. Something similar might happen again (heaven forbid). AAPL has broken below some multi-year trend lines, just as gold had done more than a year after its summer 2011 peak. AAPL trades at roughly 2X sales per share ex-net cash and cash-like assets. Operating margins may be maximal, and thus if sales falter (and consumer electronics is a classic deflationary industry), profits could take an exaggerated hit. Apple, which brought us the Retina Display, is falling behind in this same field:
DisplayMate Researcher: Apple Is Lagging Competitors in Display Tech
Given these trends, AAPL could drop to 1X sales plus cash and marketable securities, minus debt. That could end up equaling a much-derided analyst's $273 price target.
It was SJ's late-life wish that Apple would survive him as a great company. That was to be the crowning achievement of an immensely successful business career. Instead, AAPL's chart is poised as GLD's was about 15 months after its peak. Gold's breakout rally peaked around $1800, to be followed by a 1/3 decline. AAPL's rally price peaked under $600, and given that AAPL appreciated triple GLD's 5-year appreciation rate, I think that a 40-50%+ decline is a reasonable possibility.
Note I said "possibility." We shall just have to see.
Opposing views: The above has a large element of forced speculation to it. Just because gold and other metals peaked in 2011 amidst euphoria amongst gold and silver aficionados, there is no logical reason that AAPL should have the same action.
Many other disagreements with many statements made herein will be reasonable ones.
Summary: I have been struck for a long time between the concerted manias for gold (and silver) in 2011 coming after the financial crisis and then the over-hyped "crisis" of the U.S. debt downgrade and budgetary contretemps in the summer of 2011 and that for AAPL shares the next year. Yet in the topping process of each, fundamental divergences were occurring; i.e. distribution to "dumb money" was occurring. The disaster and inflation scenario for destroying gold's investment merits just as gold had risen nearly 8-fold between 2001 and 2011. Apple's post-SJ product weakness became evident in mid-2012, and this has continued even as economic activity rebalances toward housing, heavy industry, the fracking revolution, etc. Thus AAPL's recent failed breakout looks to me like GLD's failed breakout in late 2012 into 2013. Worse, Apple has followed Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM) in its stock market strategy. Given a failing growth story, it has resorted to dividend increases and stock buybacks, partially or often largely financed with borrowed money. You don't see Google doing that now, nor Facebook (NASDAQ:FB) and its ilk. You didn't see Apple doing it under the leadership of Steve Jobs.
The fading investment allure of gold shortly after its frenetic, hyper-publicized peak looks similar to the fading fundamental and technical allure of AAPL shares today. It looks to this observer that AAPL is over the long haul a good investment, just as the average stock is, but that right now, there remains more faith in current management than is justified by business success under Tim Cook's leadership.
I am bullish on the U.S. economy and favor fresher names than AAPL [e.g., see my last article on Trinity (TRN)]. It appears to me that AAPL has an elevated chance of being yesterday's fish. I think that the fundamental and technical picture look too much like gold since its 2011 peak for most new retail money to enter AAPL from the long side.
Addendum: Our empty-nester household contains one of each of the following: iPod, iPad, iPhone, iMac, MacBook Air. All get, or have gotten in the past (iPod) heavy use. Yours truly is no Apple-hater, please be aware. But I miss Steve Jobs, and I believe so does Apple's board and workforce. Thus I believe investors should miss him too.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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. Not investment advice. I am not a registered investment adviser.