The only people who lost more dollars in Apple than those holding the shares over the last six months, was maybe the unfortunate Ronald Wayne who sold his stake in the company to Steve Jobs and Steve Wozniak for $800 in 1976. Apple's decline from its peak at just over $700 in September of last year to $392 today has been a harrowing trend straight down for a group of investors that rode its tidal wave of profits on the way up. Apple's stock has not seen these prices since it broke out of a six month sideways pattern in December 2011.

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For a long period of time, Apple was the perfect combination of hot products and a hot stock. With BUYs and OUTPERFORMs abound from almost every major firm, and the stock at $680 on September 10, 2012, Monness, Crespi, & Hardt came closest to top ticking it all. They initiated coverage with a BUY and price target of $835 per share. By January, they still had a buy, but lowered their target to only $670 noting, "Supply chain checks leave us comfortable with 47 million iPhones in 1QFY13, but suggest less than 40 million builds for 2QFY13." They weren't the only sell-siders burned by Apple's fizzle, but just the most unlucky.

At its peak, Apple was the largest capitalized company in the world, and just prior to its peak, it was the largest company ever (surpassing 1999's Microsoft in nominal terms). At that moment, its capitalization was greater than $200 billion ahead of the next largest company, Exxon (XOM) - a gap as largest as the market value of International Business Machines (IBM).

Apple has experienced significant growth for sure. The company single-handedly redeveloped an entire category of electronics and saw competitors flail about trying to take a bite out of Apple. It solidified the supremacy of its product line when it created the central hub of iTunes in 2003. Apple has yet to see year-over-year quarterly sales decline since, and is one of only six companies that produced such continuous quarterly sales growth (the others being BRLI, CNQR, EZPW, GMCR, JJSF, LDR). Even more impressive is also its continuous growth in operating income during the same period. That puts Apple at the top of the heap. No other publicly-listed company has had successive growth in quarterly sales and operating income over that time. It's growth only accelerated as the company remained on the cutting edge of consumer products.

Potentially due to the law of large numbers or the slowing of the curve of product differentiation, Apple's sales growth peaked following the release of the iPad in 2010, and has been in decline since the Verizon iPhone launch. Sales in the quarter that ended this past December grew 17.7% year-over-year. Although nice growth for many, it was far less than the 70+% growth in 2011 and 2010 and the 54% in 2009. Many have begun to question whether Apple's best days are behind it.

Apple has seen moments of lower sales growth during its rocket ship-like ride before. In the quarters following the release of the iPhone 3G (which also happened to coincide with the fall-out of the economic tsunami that was the Fall of 2008), Apple grew sales only 5.8%, 8.7% and 11.7% in the first, second and third quarters of 2009, respectively. However, the one major difference between now and then is that the decline in growth now is also coupled with a decline in gross margins.

Apple's quarterly recent gross margins peaked in the period ended March 31, 2012 at 49.3%. Since that quarter, Apple's sales growth has moderated, but it's gross margins have also declined. Last quarter, at 41.5%, was the third consecutive quarter in a row of margin decline. Since Prodigal-CEO Steve Jobs returned to Apple in 1996, Apple has only once seen three consecutive quarters of decline once (in 2005), and then only marginally (pun fully intended). If Apple reports a fourth consecutive quarter of margin decline this coming Tuesday, it will be the first time it has seen such an occurrence since 1993. During that period, after decades of gross margins as high as 60%, Apple lost its luster under the directions of CEOs John Sculley and Michael Spindler and saw gross margins plummet from 47.6% to 25.7% over six consecutive quarters.

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The early 1990s was a bit of a lost period for Apple. After a number of successful years following its IPO, it split with founder Steve Jobs, and the company made a number of missteps. Apple didn't really know what it was - was it a software company, or hardware? Consumer or enterprise? The R&D budget swelled, and a number of high profile products flopped. It was a textbook example of how fast a hot company can drop. Sales slowed (although didn't really decline until several years later prompting the return of Jobs), gross margins declined swiftly, and returns on equity dropped into single digits. In the 18 months between early 1992 and the Fall 1993, Apple's stock fell 68%, and price-to-book was cut in half from 3.2x to 1.6x.

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Apple is in a much stronger position now than it was back then. However, their own experiences of 20 years ago can be a vivid example of how quickly the numbers can change in this industry. Apple has transitioned from hot growth stock to a true value play multiple times over its life. The next couple quarters will say much about what stage Apple is in. It either needs to get its mojo back by rebooting sales and maintain margins, or it is likely headed lower.

Nevertheless, Apple is still a giant. Its 44% decline notwithstanding, Apple is still the second largest company (Google, Berkshire Hathaway and Wal-Mart make up the other top five). Oddly enough, even as the second largest cap company, it is unclear whether Apple is a growth company, a value investment or with this decline, potentially, a yield play. It doesn't quite fit any billing.

Let's take a look at AAPL today.

One of the most reported items about Apple besides its stock price is its cash holdings. As of December 29, their reported balance was approximately $137 billion, and is held as follows:

At $392 per share, the cash value represents 37% of Apple's total market value. Although some of that cash is needed to run the business, it plays a crucial role in valuation. Current consensus earnings estimates call for September year end earnings of $43.90 per share. On the face of it, Apple's P/E would be 8.9x 2013 earnings. However, two adjustments are likely needed. All that cash is unlikely to be productive in Apple's ability to generate return on its equity, and therefore should be valued as a separate asset. Its market value excluding the value of that cash is $231 billion. Approximately $2 per share of the annual earnings is coming from interest on its cash balances - equating to a 1.5% return on cash. Therefore the remaining business is expected to generate $41.90 per share on $245 per share from the operating business, or less than a 6x multiple. If you assume that the treasury department needs its short-term cash (which is unlikely to have earned any interest) to operate the business, but invests longer term the non-essential cash, it would suggest more like a 7x multiple. And this is a company that has generated greater than 30% ROE since the first quarter of 2011, and a greater than 20% ROE since September 2006.

A multiple of 7x is significantly below that of IBM, Starbucks, Google, Oracle and Microsoft - even after backing out their cash balances as well. Clearly at these levels, Apple's stock is reflecting an expectation of low growth going forward, if not an outright destruction of value.

Unless they can reinvigorate growth, it appears that Apple is a business that is undergoing a transformation from growth to value. Right now, it's neither. Growth stocks don't often trade at 7-9x earnings, yet value stocks don't trade at 3.1x book value. Currently, Apple is in a bit of a no-man's land which we think is dictating its current price performance. The growth & momentum investors have moved on, but the value players have yet to be enticed. Something has to give. Apple could mitigate the problem by increasing it's dividend - they certainly have the cash to do so. At a 3%, Apple has an attractive, but not stunning dividend yield. The current dividend would unlikely support the stock during a period of prolonged margin and/or earnings decline.

Bloodhound has a library in its database of over one million pre-computed strategies. Apple shows up in less than 4% of all those strategies. The strategies range in size of holdings (10-, 20-, and 50-stocks). Strategies that hold 10 stocks and currently own Apple is approximately 10,000, or less than 1% of the library. It is interesting to note that more than 80% of those strategies were in the black for 2013 despite Apple's compounded losses. 10% of those strategies were beating the S&P 500, and 20% of those were beating it by more than 500 basis points.

By seeing which strategies would be recommending purchase of Apple, we can reverse engineer what categories of investment the stock falls within. It shows up in none of our value strategies, yet remains in a number of "high-quality" portfolios. Apple currently ranks 112 on the Earnings Growth Leaders strategy, which means it ranks high in the criteria, but not high enough to make it into the portfolio. However, Apple did move into one of our model strategies, the Lynch - GARP portfolio, 17 days ago. GARP - growth at a reasonable price - is a function of growth and price. Apple has emerged on the radar of another model strategy, the Buffett Diversified Yield. Apple currently ranks 73rd in the model strategy's universe that looks at dividend yield as well as healthy margins, solid returns on assets and non-excessive price-to-book values.

Apple no longer ranks among the top fundamental growth stories, but it has yet to become a value play. Currently, it sits somewhere in the middle. Although a popular follow, the stock has lost its sponsorship. It begins to show up on screens of GARP investors, but not yet value investors. Apple will need to either reverse fundamental trends, directly increase its dividend, or see further price decline to attract yield and value investors.

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. I have no business relationship with any company whose stock is mentioned in this article.

On March 11, we highlighted a Barron's article on Howard Marks. Right on cue, Marks released his letter to investors this week. Thanks to ValueWalk we are able to provide you with a copy of it.

I'll save you some time - skip the first four pages. Uncharacteristically, Marks spends a majority of his letter fixated on a grammatical misrepresentation of an esoteric topic. Equity Risk Premia is an important consideration for investing for sure. Author and practitioner, Antti Ilmanen, does a fine job in defining and cataloging it in his book, Expected Returns. However, Marks belaboring the issue on its mundane use by P&I is not particularly enjoyable.

On the other hand, his insights on today's equity market are interesting. Marks earned his stripes as a distressed bond investor, and as such, usually provides a unique insight on equity markets. His review of earnings yield over different historical points and comparison to that of today is a nice educational tidbit.

To gauge relative price-attractiveness, it isn't unreasonable to compare the earnings yield on a stock against the yield on a bond (or against the risk-free rate)… [In the post WWII period], the ratio between the yields was 6.25%/3.00%, or 2.08x. At the high in 2000…the yield differential or equity risk premium was a skimpy 1.12%…. [Today, we have] a yield differential of 5.25% (6.25% minus 1.00%), or 525 basis points, and a yield ratio of 6.25%/1.00%, or 6.25x.

To quote Yale Professor Robert Shiller, "we have a tendency to dogmatize and oversimplify. But the world is not simple; it cannot be reduced to a simple framework." Marks completely recognizes this in spades.

"The problem with basing a pro-equities argument on the yield comparison is that most of equities' current attraction on that basis comes from the lowness of interest rates. Just about everyone knows (a) interest rates are artificially low because of central banks' efforts at stimulus and (b) rates will be considerably higher at some point in the intermediate term. In that case, rising rates would render stocks less attractive (all other things being equal, but they're not)"

He tackles a number of Pros and Cons that face the equity markets, and makes certain conclusions.

So now we have a somewhat improved fundamental environment, a generally more optimistic group of investors, and stock prices that are a fair bit higher. No one should say the likelihood of improvement is entirely unrecognized today, as would have to be the case for this to still be stage one. I think the existence of improvement is generally accepted, but that acceptance is neither extremely widespread nor terribly overdone. Thus I'd say we're somewhere in the first half of stage two. Pessimists no longer control market prices, but certainly neither have carefree optimists taken over… I'm quite comfortable imagining a few years of equity performance that provide a pleasant surprise relative to what I think is the prevailing expectation of 6% or so per year. [his emphasis]

He ends with a theme that we have discussed here to great extent. He knows not for sure that equities will perform in-line with his predictions. However, he is unlikely to feel regret that he missed any major move in bonds. With 10-year Treasury rates near 2%, there is little to "miss." Investing is about risk/reward. Predictions rest on probabilities, and the probability of great near-term returns in bonds is quite low.

Healthcare spending among government and individuals alike, has been one of the hottest push-button issues of the last 20 years, and just as fiery now, if not more so. More than one-sixth of the U.S. economy is devoted to health care spending and that percentage continues to rise every year, outpacing inflation.

One of our favorite blogs, Zero Hedge, published a somewhat spurious analysis of government lobbying called, Who Spends The Most Dollars Lobbying Washington, DC? The author notes that healthcare companies lobby Washington as a payoff to protect their own profitability, and the dollars at stake are enormous.

"[B]etween Pharmaceutical and health product industry, hospital and nursing homes, health professionals and health services, HMOs, or more broadly Pharma/Healthcare/HMO, the total lobby dollars spent between 1998 and 2012 was a staggering $5.3 billion, or nearly three times greater than the second most generous industry: insurance, and well above Oil and Gas at $1.4 billion, and Securities and Investment at $1.0 billion."

They reference this chart from OpenSecrets.org:

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I'm no fan of government lobbying groups or their collective efforts - that's for sure. However, that said, to be fair to the industry, lumping hospitals, drug companies, and HMOs among others into one lobbying group is purely ridiculous. They are separate groups seeking to accomplish complete separate agendas. It would be the equivalent of lumping together a group of oil & gas drillers, public utilities, alternative energy groups, gasoline wholesalers and electric transmission companies and calling it "Energy."

When divided into respective groups, Pharmaceutical/Health Products still leads the pack, but at a less egregious margin. Since 2000, pharmaceuticals remained one of the top lobbying efforts consistently year after year. Although the author takes some of the data to absurdly wild and out-of-context conclusions about ROI, the fact remains that lobbyists for the pharmaceutical industry spend lots of cash to protect their constituents. One could interpret it as payment to keep their seemingly "monopolistic" practices, or payment to prevent populist action that leads to unintended consequences.

Clearly spending on healthcare has metastasized as seen in this chart through 2004, and the dollars have only gotten worse. Good for the industry, bad of consumer…

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…Or is it? Arguments can be made, such as this one in Forbes, that "health is wealth," and spending on healthcare is a sign of economic growth. Others use increased life expectancy as a valuable barometer.

Either way, a number of issues emerge regarding healthcare and the welfare of the state. Who receives and who pays for healthcare remains a prickly political issue despite landmark passage of Obamacare. Therefore, it should not be surprising that companies are spending dollars to have the ear of their favorite politician. I'm not sure it means buying political monopolies, but rather protecting interests in an ever-changing and often "easy-pickins" dynamic.

The cost of pharmaceuticals plays an important role in this debate. We have conducted an analysis on the historical profitability of the industry, and its effect on the aggregate ROE, and will re-publish on Seeking Alpha shortly. If companies are protected by their lobbying efforts, one would expect to see it in their financial results. The analysis of those numbers may not answer everyone's questions, but you may come away surprised by the results.

Recently, we focused on the Fidelity mutual funds that are actively managed and their over-diversification. As we wrote then, funds grow as big as they do and then have difficulty beating the market. Those funds track their respective index, yet charge an active management fee. Charlie Ellis writes an interest piece in the Financial Analysts Journal last Summer that dissects those fees.

Seen for what they really are, fees for active management are high - much higher than even the critics have recognized.

When stated as a percentage of assets, average fees do look low - a little over 1% of assets for individuals and a little less than one-half of 1% for institutional investors. But the investors already own those assets, so investment management fees should really be based on what investors are getting in the returns that managers produce. Calculated correctly, as a percentage of returns, fees no longer look low. Do the math. If returns average, say, 8% a year, then those same fees are not 1% or one-half of 1%. They are much higher - typically over 12% for individuals and 6% for institutions…

[I]nvestors should consider fees charged by active managers not as a percentage of total returns but as incremental fees versus risk-adjusted incremental returns above the market index.

Thus (correctly) stated, management fees for active management are remarkably high. Incremental fees are somewhere between 50% of incremental returns and, because a majority of active managers fall short of their chosen benchmarks, infinity. And when market returns are low, as in recent years, management fees eat up even more of an investor's return.

We can look at funds in one of three ways- first as a full alpha generating products; second as a split between an active component and a passive one; third as an incremental return over that produced by an index. In our Wednesday post, we concluded that it is too difficult for a fund holding hundreds of securities to be a fully alpha-generating vehicle. In regards to splitting the components, we wrote on January 13th Out of the Closet about closet indexing of funds. We highlighted a ratio called Active Share that measures the percentage of a mutual fund that can be attributed to independence from its respective benchmark index. For instance, the mighty Fidelity Magellan Fund has an active share of approximately 70% and a relatively low 55 basis point expense ratio. Magellan is benchmarked against the S&P 500, which one can replicate for 10 basis points. If 30% of the fund is essentially an index, then investors are paying 75 basis points for the balance that it actively managed. Still not bad. Fidelity's Growth Company Fund (FDGRX) has an Active Share of closer to 55 with a 90 basis point fee. The FDGRX is benchmarked to the Russell 3000. Fidelity's MidCap Index funds charge 22 basis points. As such, investors are paying 1.5% for their active component. When looking at its excess returns, it may be a better value than that of Magellan.

Finally, but most importantly, we can look at performance attribution versus the index - a feature that Mr. Ellis highlighted effectively. Forget how much of the managers selection is different than his/her benchmark, but look at what are you getting for your incremental fee. The answer is not much - or said differently, you are paying a lot for modest amounts of return differential (and in some cases, underperformance). Once again we highlight the same Fidelity Funds, looking this time at fees, R-squared, Beta and Information Ratio. The Info Ratio measures a fund's active return (fund's average monthly return minus the benchmark's average monthly return) in relation to the volatility of its active returns. RR² (R-Squared) is a historical measurement, calculated in this case over 36 months, which indicates how closely a fund's fluctuations correlate with the fluctuations of its appropriate benchmark index. An RR² of 1.00 indicates perfect correlation, meaning all the fund's fluctuations were explained by fluctuations in the benchmark index, while an RR² of 0.00 indicates no correlation. For example, a fund with an R-squared of 0.80 indicates that 80% of the fund's past fluctuations were explained by changes in the benchmark index. Generally, the higher the R², the more meaningful the beta figure.

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Each of the Fund's have R² greater than 90% with the exception of the somewhat aptly-named Independence Fund at 88%. The median fund had a negative Information Ratio. As for the Magellan Fund, that 75 basis points of "excess" fee doesn't look as attractive anymore. The fund trades in-line with the S&P but consistently has underperformed. The Fund has 10% of its assets in non-U.S. securities which is one contributing factor in its even modest differentiation, but looking at the following portfolio characteristics, its not surprising that it's returns are close to benchmark.

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This isn't necessarily a case advocating an index approach. Rather, an investor needs to understand what they are paying for, and how they can potentially improve upon that strategy on their own. Creating a thoughtful, time-tested strategy with a reasonable mix between concentration and diversification can allow you to generate alpha without diluting yourself with fees. Try our Strategy Builder at www.BloodhoundSystem.com to produce your own.

Last month, we wrote about the poor nominal returns experienced by the market over the last 12 years. We noted that some of the countries largest pension funds had expected returns on asset well in excess of their actual returns. JP Morgan recently highlighted in a graph the gap that is growing in plans assets and pension obligations. They note the decline in discount rates among major providers, which is another major contributing factor.

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Unless the major defined benefit (DB) plans can quickly recoup the gap through incredible returns on plan assets (which is not likely given the market's expected real return on a blended portfolio of 60/40 equities/bonds, combined with the fact that those plans are only invested 30% in equities), the sponsoring corporations will need to make some additional contributions. That affects cash balances, and earnings as it relates to pension expense.

In our Blog pages, we have argued many times that we believe the long-term case for stocks on a risk/reward basis is much greater than bonds - particularly government bonds. However, I am a man of presenting both sides of an issue. I saw this Forbes interview with Gary Shilling, and I soooo wanted to present it as contra-case for bonds and against equities. However, the case and subsequent advice in this interview/article is so flawed, I just couldn't do it.

Let me start with this caveat: Mr. Shilling, president of A. Gary Shilling & Co., author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation and a Forbes columnist, predicts that the 30-year Treasury rate is going to 2% and the 10-year is going to 1%. If that turns out to be true, then yes, you will have wanted to be long treasuries and most likely short stocks (given the circumstances that would have to have occurred to lead to us those yields). If the long bond goes to 2%, holders will in fact see a 24.6% capital appreciation. Currently, the all-time low in the 30-year was 2.458%. Granted, that level occurred last July.

I am not in the prediction business. I can't tell you when or what level prices will be achieved. However, I can tell you that rates can not stay at those levels forever. You would have to be a particularly daft trader to capture that type of return. Instead, I look at the risk versus return. As many could argue for long-term rates at 4.5% as those that argue for 2%. Those that hold 30-year treasuries would experience an equal 24.6% capital loss if rates returned to levels seen in 2011. And rates could easily remain there. Over time, rates could go significantly higher, and the capital losses would be greater.

Since 1981, the year Mr. Shilling states he began investing, the treasury rates have been on a 30-year secular bull run. Rates are (most likely) bounded by zero, meaning there is only a limit as to how much they can go down. But history has shown the levels in which it can rise to. Therefore, the histogram of possibilities is hugely asymmetric to the bad side. And even with historically abnormal run in bond returns and a lost decade for equity returns in the 2000s, stocks still outperformed bonds during that run. As we pointed out in our blog post, Really Nominal, the aggregate expected real returns in government bonds is zero.

I don't mean to disrespect Mr. Shilling. He makes some significant and compelling points in the interview. His discussion about financial leverage and real GDP are both interesting and educational. His comments regarding bubble conditions in junk bonds and other corporate debts are quite valid.

Forbes: So do we have a bond bubble outside of treasuries today or are treasuries part of the bond bubble?

Shilling: We definitely do. If you can believe this, 46% of junk bonds are selling at or above call. In other words, they are selling at or above a price at which the companies can call them back. And of course they call them back as soon as they can because they can reissue the debt even cheaper. Another thing is the difficulty with which a low-grade company has defaulting. It takes real skill to default today because there's so much money thrown at them. And this is, in my view, clearly a bubble.

Mr. Shilling's own prediction is predicated with its own preposterous caveat. His ultimate belief (as seen by his rates prediction) is that investors should be positioned long in bonds, and short (or no exposure) to equities. However, prior to reaching that ultimate asset allocation, one should time the market.

Shilling: Well, yes. I think right now, as long as you have the risk on and people are enamored with stocks and the grand disconnect is there, what we're suggesting is being long equities, but selectively and cautiously. In other words, I like things like consumer staples. I like companies that pay high rising and sustainable dividends…

Forbes: Now in terms of stocks, you see the grand disconnect ending. What you still want to be in dividend-paying stocks?

Shilling: No. No, at that point I think you want to be out of stocks pretty much entirely.

Forbes eloquently responds, "So you have a very delicate timing issue here."

You have to be ready to really shift gears and get out of stocks and go heavier into treasuries and certainly avoid or go short things like junk bonds and emerging market bonds, more commodities, things that are right now in demand with the risk-on, with the grand disconnect in full flower.

So in the end, the suggestion is that bond yields are going lower, but only play that card when its obvious. I hate to break the news, but by the time you know the apparent grand disconnect is over, it will be too late. Instead, stick with long term strategies and watch the risk/reward. Market timers and prognosticators all have their moments, but thoughtful and dedicated long-term investors end up the winners.