Apple $395: Time To Give Up And Abandon Ship? [View article]
All depends on your investment system. People who bought when it was 10% or 20% undervalued, were too early. Depending on quality, once a company is 30% to 50% undervalued it is normally a great bet. And downside volatility becomes minimal.
Trend following strategies like yours can also be a successful, though the issue remains that the beginning and ending of a trend are easy to spot only in hindsight, hence you tend to lose most on your entries and exits (false breakouts and retracements).
Overall value investors have done better than trend followers with much lower volatility. This is because trendies enter on highs (such as breakouts) and exit on lows (breakdowns). Value investors generally enter on lows (though on a percentage of investments those lows get lower) and exit on highs.
On a personal note, I combine a value approach with some technical analysis and I will be buying Apple (which in my mind is more than 30% undervalued) once the technicals confirm a bottom. There is no hurry, a bottom will take 3 to 7 weeks to form (and will most probably retest). Apple has been under distribution since February.
Apple $395: Time To Give Up And Abandon Ship? [View article]
Truth be told few people (if any) can tell for how long an undervalued security will stay undervalued.
My experience is that 80% of undervalued securities are revalued within 3 years and 95% within 6 years. However, there are some well known and well respected companies (e.g BRK) that can remain undervalued for over 10 years.
Whilst it is a fact that Apple is undervalued by any metric anyone can throw, it may well be back in favour before EOY (and it is certainly a bet worth taking) but it may not.
Apple $395: Time To Give Up And Abandon Ship? [View article]
Fortunately or unfortunately seeking alpha brings together a large number of market participants with vastly different investment/trading strategies.
There are so many different ways to play Apple depending on strategy, skill, portfolio size and time horizon. Many of them will result in profitable calls others will lose money.
Value investors: Apple in all probability is undervalued. Value investors are taking positions and will continue to buy as long as it remains undervalued (EV/EBTIDA is just 4). Regardless of whether it goes up or down after they buy.
GARP investors will stay clear since growth is likely to be subdued over the next few years.
Dividend investors should wait for a dividend increase or a clear dividend policy in which a percentage of its cash will be returned to shareholder in the form of buy backs or dividends. If the company decides to only keep enough cash required to support 25% RoE then their is plenty of cash available to distribute to shareholders.
Speculators will take positions on anticipation of an increased dividend, or some other insight they have as to what will happen in the near future and how the market will react to it.
Momentum traders/Trend followers will stay short until the trend has turned or until they have some signal that the current down trend is over. Personally I see many signs (rate of decline has slowed, accumulation has started).
Chart readers/tape worms will be watching to see what type of consolidation base is being built around the $400 mark, what price range will be stablised over the next couple of weeks and reach a conclusion as to whether the breakout will be on the upside or downside and either buy in anticipation or wait for the breakout (or breakdown).
Fact is for a stock that has run up from 100 to 700 in 3 years, a 30% to 50% retracement is quite normal and quite usual.
Apple's Falling Share Price And The Market's Implicit Growth Implications [View article]
Good article. I agree (sort of) with the price band - my band was $450 to $700, based on DCF - growth 2% to 8% which I believe incorporates 95% of likely outcomes. Though I suspect 3% to 6.5% would incorporate more than 80% probability.
Those critical of a wide price range don't get that the range will be as wide as dictated by the probability distribution of the key variables. Otherwise you will fool yourself with precision that does not exist.
Sorry to hear you will no longer be writing for SA.
The critical question is whether or not Apple has a competitive advantage and if so how durable it is, if not then margins and return on assets will be eroded by competitive forces as is the case for all companies without some time of defensive.
In my mind Apple's advantage is innovation, it it wasn't able to innovate better than competition it would not be in its current position. Traditionally consumer electronics is a no moat playing field, however Apple has managed to maintain a premium on Mac and interestingly on iPod for a very long time. What is funny about iPod is that competing mp3 players have consistently sold at about a quarter of the price.
Only time will tell whether Apple's innovation is in its culture or in its late founder. Given its last stint without him the odds are that it was in the man and not the organisation. However, I am always eager to be proven wrong.
The other thing worth thinking about is Apple's strategy. Apple has refused to put its nose in the low end, many (including myself) thought this would ultimately be a mistake (my reasoning was that in computing the winner goes to the firm with the biggest eco system and volume leadership was critical to maintaining a stronger eco system) as things have panned out I am now less sure.
If Apple holds onto the top 25% of the market (where 80% of the money is spent) then the ecosystem remains strong because who wants to develop for people who stick mainly to the free version. At the same time Apple avoids the commoditisation, that normally happens as the consumer electronic product cycle matures.
I have not the answer, but many of the questions and closely watch to see when Apple actually comes under pricing pressure as opposed to us all worrying that it will.
I also watch the upgrade cycle, as many Apple users now have more than one Apple device and increasingly appear locked into iTunes (and in the future MAY become locked into cloud services.)
I have Apple's and Androids, I love my Galaxy Note 2 - it has a great but still portable screen and is excellent for taking notes in meetings (which is actually more expensive than my iPhone 5) but my wife and kids continue to cling to their Apple's, one of the kids just 'upgraded' from an iPad to an iPad mini, even though she could pocket the 30% savings. The same decisions are being taken by millions of Apple customers every day.
The Real Reasons Why Apple Is Tanking [View article]
The opportunity to buy the lows is fast receding. Apples technical action suggests that sellers are getting exhausted, they couldn't take out last weeks low on Wed, nor could they sell more volume on Wed than on 8 Nov (the height of the fear selling.) And indeed both lows (this week and last week) were followed by strong (and disciplined) accumulation.
I will be surprised if Apple will be on sale again for below $520 and if you're really keen to be an owner I wouldn't balk at paying $550. Fact is no one knows at what price it will be offered, but it is clear that value buyers are all over it at $520 to $540.
And since any fool who's spent more than a month analyzing stocks can tell you that it is worth more than $700. And it is well known that value buyers become interested from 20% to 30% below fair value. You go figure.
I managed to replace my lost inventory at $535 yesterday (I sold half my position in Oct as I couldn't stand the pain of seeing my winnings shrinking so fast.)
Apple's Cash Position Is Overstated By $70 Billion [View article]
The beauty of DCF valuations is that they appear so scientific and objective. Whereas just like everything else about the future they are just a guess.
Bottom line, you are saying Apple should be trading at less than 12 times earnings because: i) revenue growth will slow to -5% in a couple of years and following that its competitive advantage is so weak that it will not even be able to keep up with inflation moving forward; ii) margins will decline because it will have to cut prices to fight competition and falling operator subsidies; iii) capex will increase (and this is the really ridiculous one) because they will have to spend more money to support their struggling suppliers to grow capacity, even though the growth is -5% and then just 2%.
What your saying in effect is that apple is a broken company (declining real revenue, declining margins, increasing capital expenditure.) I don't buy it, I'll have to see it to believe it.
Our worst case is revenue growth declining to 6%, margins down to 26% and capex flat (you won't need additional capex unless you get growth.) And a valuation of $600. Our better case scenario's value it at $800. Our expectation is that the value is somewhere in between. We don't know what the value is, nor in our opinion does anyone else, but I would wager than 90% of investors also have valuations somewhere between the two.
I'd be a buyer below $550, a seller above $850 and a short seller above $1,000. I like to take bets where the odds are massively in my favor.
Most of the supposed criticisms of Apple do not show up in the shareholder record. Apple is owned by over 7,000 institutions.
This is also the reason, despite its success, that it will remain undervalued (you can participate in the earnings expansion, but not a change of multiple.) It takes institutional buying to drive up the price of a large cap much above its 50MA for an extended period, and there's no one left to buy. Apple is not overbought. It is over owned.
Apple's Monster Quarter And The Pending Share Price Advance [View article]
The market does not understand that we are in a new phase of the revolution that started with the mainframe. Driven by miniaturization of transistors and improvements in the MMI (man machine interface.) Each phase from mainframe, to mini, to desktop, and now mobile (from rewiring circuits, to punch-cards, to keyboards, to graphical user interfaces, and now gestures, and in future natural language) has represented a +ten fold increase in accessibility and market opportunity. By 2020 80% of the adult population GLOBALLY will be connected to the internet using a mobile smart device. The question is what hardware and software will they be running. My bet is iOS and Android. Penetration levels are currently 35% in the US and 10% globally, you figure the limits of Apples growth. Disclosure; Long Apple, Long Google, Long facial and voice expression recognition and thought controlled smart devices :-)
Apple Needs to Pay a Big Special Dividend or Buy Back Stock [View article]
Every company has to have a sensible strategy around the management of surplus cash and the way it returns cash to shareholders.
Apple needs to estimate the amount of cash it needs to operate its business, including strategic activities and the amount for any reasonable acquisitions. It then needs to decide the most effective ways to give the rest to shareholders, or to invest in activities that will deliver at least 15% return.
The purpose of a company is not to become the most valuable company in the world by hoarding cash. The purpose is to pursue and fulfill its mission in a socially mature way, and maximize the return to those who provided capital for it to do this.
Also remember that Steve Jobs will hand over the reigns at some point, the next CEO may be better or worse (but not likely the same.) Large amounts of unneeded funds have pushed many CEOs of leading companies down the wrong path, leading to the wasting of the funds and more importantly the erosion of the competitive advantages that produced them (look at the history of Coca Cola.)
Apple's Future Depends on Leaping Hurdles, Not Earnings [View article]
Good article (whether or not their guidance is useful.) I too have wondered why AAPL is so cheap, but not really known or bothered to do the research.
I still suspect that in addition to the reason given, the market finds it difficult to believe that such a large company can continue to deliver such high growth percentages (it gets more and more difficult as you enjoy gigantism) and the fact that with 6,600 institutional shareholders there aren't that many more buyers to drive the price. (I'm still long AAPL)
Apple $395: Time To Give Up And Abandon Ship? [View article]
Trend following strategies like yours can also be a successful, though the issue remains that the beginning and ending of a trend are easy to spot only in hindsight, hence you tend to lose most on your entries and exits (false breakouts and retracements).
Overall value investors have done better than trend followers with much lower volatility. This is because trendies enter on highs (such as breakouts) and exit on lows (breakdowns). Value investors generally enter on lows (though on a percentage of investments those lows get lower) and exit on highs.
On a personal note, I combine a value approach with some technical analysis and I will be buying Apple (which in my mind is more than 30% undervalued) once the technicals confirm a bottom. There is no hurry, a bottom will take 3 to 7 weeks to form (and will most probably retest). Apple has been under distribution since February.
Apple $395: Time To Give Up And Abandon Ship? [View article]
My experience is that 80% of undervalued securities are revalued within 3 years and 95% within 6 years. However, there are some well known and well respected companies (e.g BRK) that can remain undervalued for over 10 years.
Whilst it is a fact that Apple is undervalued by any metric anyone can throw, it may well be back in favour before EOY (and it is certainly a bet worth taking) but it may not.
Apple $395: Time To Give Up And Abandon Ship? [View article]
There are so many different ways to play Apple depending on strategy, skill, portfolio size and time horizon. Many of them will result in profitable calls others will lose money.
Value investors: Apple in all probability is undervalued. Value investors are taking positions and will continue to buy as long as it remains undervalued (EV/EBTIDA is just 4). Regardless of whether it goes up or down after they buy.
GARP investors will stay clear since growth is likely to be subdued over the next few years.
Dividend investors should wait for a dividend increase or a clear dividend policy in which a percentage of its cash will be returned to shareholder in the form of buy backs or dividends. If the company decides to only keep enough cash required to support 25% RoE then their is plenty of cash available to distribute to shareholders.
Speculators will take positions on anticipation of an increased dividend, or some other insight they have as to what will happen in the near future and how the market will react to it.
Momentum traders/Trend followers will stay short until the trend has turned or until they have some signal that the current down trend is over. Personally I see many signs (rate of decline has slowed, accumulation has started).
Chart readers/tape worms will be watching to see what type of consolidation base is being built around the $400 mark, what price range will be stablised over the next couple of weeks and reach a conclusion as to whether the breakout will be on the upside or downside and either buy in anticipation or wait for the breakout (or breakdown).
Fact is for a stock that has run up from 100 to 700 in 3 years, a 30% to 50% retracement is quite normal and quite usual.
Apple $395: Time To Give Up And Abandon Ship? [View article]
Even if its margins decline 35% it will be selling at a cheap price of 6.
I don't know how far down Apple will go, but I'm more than certain that it will go back up.to an EV/EBITDA above 7.
In the short run the market is a voting machine, in the long run a weighing machine.
Apple's Falling Share Price And The Market's Implicit Growth Implications [View article]
Those critical of a wide price range don't get that the range will be as wide as dictated by the probability distribution of the key variables. Otherwise you will fool yourself with precision that does not exist.
Sorry to hear you will no longer be writing for SA.
Enough About Apple [View article]
In my mind Apple's advantage is innovation, it it wasn't able to innovate better than competition it would not be in its current position. Traditionally consumer electronics is a no moat playing field, however Apple has managed to maintain a premium on Mac and interestingly on iPod for a very long time. What is funny about iPod is that competing mp3 players have consistently sold at about a quarter of the price.
Only time will tell whether Apple's innovation is in its culture or in its late founder. Given its last stint without him the odds are that it was in the man and not the organisation. However, I am always eager to be proven wrong.
The other thing worth thinking about is Apple's strategy. Apple has refused to put its nose in the low end, many (including myself) thought this would ultimately be a mistake (my reasoning was that in computing the winner goes to the firm with the biggest eco system and volume leadership was critical to maintaining a stronger eco system) as things have panned out I am now less sure.
If Apple holds onto the top 25% of the market (where 80% of the money is spent) then the ecosystem remains strong because who wants to develop for people who stick mainly to the free version. At the same time Apple avoids the commoditisation, that normally happens as the consumer electronic product cycle matures.
I have not the answer, but many of the questions and closely watch to see when Apple actually comes under pricing pressure as opposed to us all worrying that it will.
I also watch the upgrade cycle, as many Apple users now have more than one Apple device and increasingly appear locked into iTunes (and in the future MAY become locked into cloud services.)
I have Apple's and Androids, I love my Galaxy Note 2 - it has a great but still portable screen and is excellent for taking notes in meetings (which is actually more expensive than my iPhone 5) but my wife and kids continue to cling to their Apple's, one of the kids just 'upgraded' from an iPad to an iPad mini, even though she could pocket the 30% savings. The same decisions are being taken by millions of Apple customers every day.
The Real Reasons Why Apple Is Tanking [View article]
I will be surprised if Apple will be on sale again for below $520 and if you're really keen to be an owner I wouldn't balk at paying $550. Fact is no one knows at what price it will be offered, but it is clear that value buyers are all over it at $520 to $540.
And since any fool who's spent more than a month analyzing stocks can tell you that it is worth more than $700. And it is well known that value buyers become interested from 20% to 30% below fair value. You go figure.
I managed to replace my lost inventory at $535 yesterday (I sold half my position in Oct as I couldn't stand the pain of seeing my winnings shrinking so fast.)
The Real Reasons Why Apple Is Tanking [View article]
Apple's Cash Position Is Overstated By $70 Billion [View article]
Bottom line, you are saying Apple should be trading at less than 12 times earnings because: i) revenue growth will slow to -5% in a couple of years and following that its competitive advantage is so weak that it will not even be able to keep up with inflation moving forward; ii) margins will decline because it will have to cut prices to fight competition and falling operator subsidies; iii) capex will increase (and this is the really ridiculous one) because they will have to spend more money to support their struggling suppliers to grow capacity, even though the growth is -5% and then just 2%.
What your saying in effect is that apple is a broken company (declining real revenue, declining margins, increasing capital expenditure.) I don't buy it, I'll have to see it to believe it.
Our worst case is revenue growth declining to 6%, margins down to 26% and capex flat (you won't need additional capex unless you get growth.) And a valuation of $600. Our better case scenario's value it at $800. Our expectation is that the value is somewhere in between. We don't know what the value is, nor in our opinion does anyone else, but I would wager than 90% of investors also have valuations somewhere between the two.
I'd be a buyer below $550, a seller above $850 and a short seller above $1,000. I like to take bets where the odds are massively in my favor.
Currently long AAPL.
When To Sell Apple? [View article]
I said that it will not have a significant multiple expansion. You can participate in the earnings growth, which is stellar.
When To Sell Apple? [View article]
This is also the reason, despite its success, that it will remain undervalued (you can participate in the earnings expansion, but not a change of multiple.) It takes institutional buying to drive up the price of a large cap much above its 50MA for an extended period, and there's no one left to buy. Apple is not overbought. It is over owned.
Apple's Monster Quarter And The Pending Share Price Advance [View article]
Apple Needs to Pay a Big Special Dividend or Buy Back Stock [View article]
Apple needs to estimate the amount of cash it needs to operate its business, including strategic activities and the amount for any reasonable acquisitions. It then needs to decide the most effective ways to give the rest to shareholders, or to invest in activities that will deliver at least 15% return.
The purpose of a company is not to become the most valuable company in the world by hoarding cash. The purpose is to pursue and fulfill its mission in a socially mature way, and maximize the return to those who provided capital for it to do this.
Also remember that Steve Jobs will hand over the reigns at some point, the next CEO may be better or worse (but not likely the same.) Large amounts of unneeded funds have pushed many CEOs of leading companies down the wrong path, leading to the wasting of the funds and more importantly the erosion of the competitive advantages that produced them (look at the history of Coca Cola.)
Apple's Future Depends on Leaping Hurdles, Not Earnings [View article]
I still suspect that in addition to the reason given, the market finds it difficult to believe that such a large company can continue to deliver such high growth percentages (it gets more and more difficult as you enjoy gigantism) and the fact that with 6,600 institutional shareholders there aren't that many more buyers to drive the price. (I'm still long AAPL)