There have been a lot of earning disappointments this quarter. 3M (MMM), which is a bellwether, reduced its profit expectations because of weak market conditions. DuPont (DD) will cut about 1,500 jobs, United Parcel Service (UPS) said there is uncertainty about the holiday season, and Xerox (XRX) has seen steep sales declines.
Corning (GLW) stock saw double-digit declines after the company's CEO said the current quarter was a disappointment and, furthermore, his guidance looking forward was not that rosy. And then there was Google (GOOG) that got hit hard, probably for not being able to surprise the market.
But Apple (AAPL), as far as I'm concerned, did not disappoint and its earnings were in line. If you are committed long term to the stock, a slight miss here or there is not, in my mind, a deviation from analyst estimates.
Yes, iPad sales disappointed a little, but that was expected with all the new product releases. And as was stated by many analysts, whenever you have such a big change in your product line, there are many upfront costs that might hit your bottom line temporarily. Also, the fact that there are some production disturbances here and there and the company was not able to keep up with demand is not the end of the world. Think of it this way: There will be pent-up demand for Apple's products in the upcoming months.
In a nutshell, my invest theme for Apple (read Part 1 here and Part 2 here) is basically that this stock is too big to go up much further. Also, sooner or later sales and earnings growth (probably within the next year or so) will slow down.
Now, this does not mean I have a short recommendation on the stock. My recommendation simply states that Apple stock is a prime candidate to become a dog stock, meaning that it will earn good money but the stock will not do much for shareholders from here on out.
The problem with Apple isn't that it's expensive, but that it's too big. By big I mean in market cap terms. Currently, it has a market cap of about $570 billion and when it was around $700, its market cap was around $650 billion. In order for Apple to double from the $700 mark (as many were hoping), it means that its market cap will grow to about $1.3 trillion. That's about 7%-8% of U.S. GDP and about 7-8 times the GDP of Greece.
There is the argument that Apple is relatively cheap. I don't doubt that at all, but for Apple to double from these levels a record amount of stock rotation has to occur in order for money to leave everything else and go into Apple stock. Honestly, I don't know if there is that much investment capital around that can be put into Apple in order for the stock to double.
Think of this: Apple already has about 70% institutional ownership, and just about every high-tech hedge fund out there is already invested in the stock. We all know that 100% of all hedge funds won't buy Apple. So who is left to pour money into the stock for it to double?
One negative point about yesterday's conference call is that Apple's guidance for the fourth quarter falls short of current analyst estimates. This might be a bad sign, because the market is used to being surprised to the upside and not to the downside. So perhaps this is something to keep in mind, not only because it might actually mean something in terms of future growth and profits, but also because analysts might lower guidance from here on out -- and that might change the prospective the market has about the company for the next two years or so.
So my invest theme for Apple is this: While Apple will continue to sell a lot of phones and perhaps continue to grow at around 20% for one to two years or so, I think this isn't enough for the stock to double from the $700 mark. In my book, when a stock does not have the capability to double, it is not a stock I would want to have as a long-term core position. Again, let's forget about the past and the 10,000% return the sock has given from the bottom (another reason to sell like I have said); I am talking about from the $700 mark, from which I said take the money and run.
In order for Apple to double from here, it has to invent some new gadget along the lines of the iPhone. It literally has to invent a whole new product line or buy another company that has one and then be as successful as it was with the iPhone. Having said that, I have to admit, if there is any company on earth that can reinvent itself and come up with a similar success story like the iPhone, it is Apple. However, I am not willing to bet on such an outcome. As a result, I think the stock will go up, down, and sideways, but it offers little possibility of doubling from these levels.
If the trend is your friend, then the trend near term no longer favors Apple. As you can see in the chart bellow, the current uptrend has broken down. Where it will stop nobody knows; however, I don't think we have much downside.
Click to enlarge image.
As you can see from the chart above, if this downtrend continues I think Apple's stock could go as low as $530-$500, but that is probably all the downside Apple's stock will or can see. If this does happen, I think the stock will be bouncing up and down within the price range of between $550 and $800. From here, $800 is not a bad return, but please remember that $800 is not that good of a return if you bought it at $700.
To make a long story short, I don't think that Apple can double and, as such, my recommendation is that it will be a bad long-term, buy-and-hold stock from now on. However, I also think it will probably be one of the better swing trade stocks for years to come.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.