- Apple's surprising 7-for-1 stock split signals a significant about-face for the company.
- Institutional ownership of Apple is at a five-year low.
- If the company's industrial designers get back on center stage, the stock has plenty of room to run.
Apple's (NASDAQ:AAPL) CEO, Tim Cook has been channeling Steve Jobs recently.
In the company's Q1 earnings call, Cook pulled off a major surprise. The strong second-quarter results took a backseat to a slew of other bids to appease investors. The biggest surprise, however, came when Cook announced a 7-for-1 stock split that should "make Apple stock more accessible to larger numbers of shareholders."
It was a piece of theatre reminiscent of Apple's founder Steve Jobs, who was legendary for sniffing the wind, sensing what lay ahead, and then making a move that surprised everyone. (And often sent the stock on an insane run.) It wasn't merely a surprise, however, it was a signal from the tech giant's current CEO that Apple is changing direction. After a year of getting bullied and bruised by Wall Street pros, Cook has decided it's time to expand his audience.
Cook's latest target is a segment of the investing public that is not only a lot easier to please, but who is coming back in force. Namely, America's mom-and-pop investors.
Cook's timing is impeccable. Discount brokerages TD Ameritrade (NYSE:AMTD) and E-TRADE Financial Corporation (NASDAQ:ETFC) both reported sizable trading volume jumps in the first quarter this year, a key indication that retail investors are getting more active. ETRADE reported 33 percent more volume, while TD Ameritrade reported a 30 percent rise, according to a Wall Street Journal report.
Up until recently, Apple paid little attention to Mom and Pop. Apple's shares have traded for years at a cost per share so high, they are out of range for many retail investors. As Jay Yarow pointed out recently, he's heard people say they would buy Apple, but it's too expensive to buy one share.
It's also a remarkable about-face for Tim Cook. Just two years ago, Cook told shareholders stock splits were a lousy idea. He insisted they would be bad for the stock, and in the long run accomplishing nothing. In other words, in his past incarnation, Tim Cook was strongly against a stock split.
But that was before the company faced reality. Ever since Steve Jobs died on October 5, 2011, hedge funds have become increasingly uncomfortable holding the stock. As Morgan Stanley's chief Apple analyst, Katy Huberty said in 2012, "hedge funds treat Apple like junk." She pointed out that the company's high share base turnover indicated it traded among the funds like a low-quality stock.
It's gotten worse since. Two years ago, there were expectations that another major category creation was just around the corner for Apple. Today, we're still waiting.
Apple used to be loved by the "smart money." But while some hedge fund managers (notably, David Einhorn and activist Carl Icahn) remain outspoken Apple bulls, hedge fund after hedge fund has dumped their entire Apple positions. Many did so in the fourth quarter of last year, according to 13Fs filed with the Securities and Exchange Commission. Those funds included John Thaler's JAT Capital, Stephen Mandel's Lone Pine, Dan Loeb's Third Point LLC, Andreas Halvorsen's Viking Global and John Burbank's Passport Capital.
Institutional ownership (banks, mutual funds, hedge funds and other financial institutions) has hit a five-year low. In February, Morgan Stanley found that Apple's current top 30 ownership share is just 30 percent, compared to a 36 percent five-year average. That's not due to a widespread trend. Apple is the glaring exception to a current exceptionally high institutional ownership of large-cap stocks.
So what's the takeaway for Apple investors? Should we be nervous? Or excited?
There's cause for worry. Up until now, Cook has chosen the incremental improvement pathway. While that can generate value, it doesn't generate the kind of earnings growth that will keep this stock moving upward.
Positive reasons to buy or hold Apple stock this year are based on whether Tim Cook has further surprises in store. The ramp-up in iPhone sales right now could be a perfect set-up for the coming iPhone 6 release. While Apple's usual release traditions suggest the iPhone 6 release date will be September/October 2014, there are signs Cook could be targeting mid-to-late summer.
There are also possibilities of minor surprises in the iPhone 6. A larger redesigned form factor is almost baked in, but possible new features include heart rate EarPods and a significantly thinner chassis. A curved display screen and a pressure, temperature and humidity sensor (like those in the newly-released Galaxy S5) are less likely, but could catalyze the stock even higher. And then, of course, somewhere down the road are pressure-sensitive keys and a digital wallet built in.
If Apple resumes its historical trajectory as a disruptive innovator, the next move will be the annexation of a different industry. There's two likely targets. A long-delayed Apple Television would be a revolutionary invasion of a new product zone. And then there's wearable computing, which right now, is a mess of geeky, poorly-designed products crying out for Apple's elegant vision and intuitive friendliness.
Of course, right now, the chance of a new breakthrough product category from Apple is nothing but wild chatter swirling around the blogosphere. However exciting and amusing the stories are, the products have to actually show up.
But Apple's hire of Angela Ahrendts, CEO of Burberry, as head of retail, and a slew of other appointments from industrial designers to engineers who build biometric sensors aren't for naught. There's something major afoot. Apple is no holiday camp for the indolent as an employer, and Cook is arguably a better people manager than Jobs. He's more disciplined, more orderly and less unstable. I just finished "Steve Jobs" by Walter Isaacson, and while Jobs was arguably the greatest innovator America has ever seen, his obsession for control had its downside.
If Apple does expand into a new category in 2014, the stock could easily make a strike beyond its all-time high. Apple has a base of devoted customers and the ability to deftly manage a gigantic cash hoard. What it lacks is the kind of big surprises that used to send the stock on its powerful runs.
Cook is not in Jobs' league as a visionary, but he has a redeeming feature that can't be overlooked. He was Jobs' handpicked successor, and Jobs wasn't easy to please. The jury's still out on Cook. But if he can learn to take a page out of Jobs' book and start delivering more surprises, he can change the sentiment about the stock.
The stock split is scheduled for June 8, just in time for America's families and retired folk to scoop up some shares before loading into their SUVs and RVs and heading out on vacation. I'm almost certain Mom and Pop will take Tim Cook up on his offer and give him what he's looking for. A little more time to prove himself.
I'm less positive Cook will keep channeling Jobs. But maybe he won't have to. If Apple's industrial designers get back on center stage this year, Apple's products will stop being also-rans, and begin to electrify the world again. Even without Jobs' giant personality, that should be enough.