Why It's Time to Sell Apple

| About: Apple Inc. (AAPL)
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It’s time to sell Apple (NASDAQ:AAPL). There are probably not that many people who will tell you that right now, if any really. However, that is a large part of my rationale for selling it. First, I should be very clear up front that I love Apple as a company, a stock, a retailer, and the manufacturer of the best consumer electronics on the market. I will argue any day that Apple is the best run company on the face of the planet and the performance in its stock over the past two years reflects that. If you read my article Ultra Bull: A Case For The Succession Of Apple back in February of 2009, it would be obvious how deep my passion for this company runs. You would also be up close to 250% over the last two years because I recommended buying the stock at a closing price of $90.25 on February 24th. You would be up considerably more than that if you invested in the LEAP strategies I recommended. However, all good things must come to an end...at least temporarily.

Lately the enthusiasm and bullishness surrounding Apple has reached a fever pitch. The company has crushed analyst estimates for the last 17 straight quarters. I can’t say for sure, but that must be some kind of record. Everyone expects Apple to deliver another blowout quarter simply because they have such a reliable track record. The consensus estimate is for Apple to report $4.08 per share for Q4, an increase of 124% over the previous year. Contrary to popular belief, though, I think the expectations are simply too high going into this earnings report. The abysmal performance in the bank stocks last week coupled with comments from a few key analysts convinced me to close all of my Apple positions after one hell of a ride.

For anyone that hasn’t read Gene Munster’s latest comments on Apple, you certainly should. Gene has a excellent track record following Apple and is one of the few sell-side analysts that actually understands the fundamentals driving Apple’s business and their potential for growth. Of particular interest, he cites the relatively low profit margin for the iPad, about 30%, and the dilutive effect its strong sales may have on earnings. Further, he says that product shortages resulting from production constraints might tamper sales figures. I think he makes some very credible points and his opinion should certainly be taken seriously. You can find highlights from Gene’s report here.

Unlike Gene Munster, there are some sell-side analysts that serve as fairly reliable contrarian indicators. Take a look at RBC Capital Markets analyst Mike Abramsky’s call on Apple back on January 16th of 2009, available here. He placed a sell rating on the stock with a price target of $70. This was literally ONE TRADING DAY before Apple bottomed on January 20th, only to rally 280% over the next 22 months. On Friday, Mike Abramsky released a note, available here, saying he expects Apple’s sales in the fourth quarter to exceed $20 billion on sales of 13.5 million iPhones. The consensus estimate is for $18.76 billion in revenue, so Abramsky is predicting a beat on the top line of 6.6%. Further, he currently has the highest earnings estimate of all Wall St analysts. By contrast, Gene Munster has the second lowest estimate of all Wall St analysts. Gene is predicting that Apple will earn $3.87 per share for Q4, 5% below consensus estimates.

Perhaps more troubling than Mike Abramsky’s change of heart is the breakdown in bank stocks that took place this past week. Most notably, Bank of America (NYSE:BAC) shed close to 13% since its intraday high on Wednesday. They weren’t alone, though. Wells Fargo (NYSE:WFC), JPMorgan (NYSE:JPM), Citi (NYSE:C), and pretty much every other major bank had huge selloffs. I don’t know enough about this most recent mortgage scare yet, but I do know that this recent rally will not be able to continue with performance like this in the financials. Look no further than the major indices on Friday to see what I’m talking about. The Nasdaq is being held up by strong performance from heavyweights like Google (NASDAQ:GOOG) and Apple, but the Dow closed down on the day and the S&P was flat. So far the tech stocks have been driving this rally, but if the financials continue to fall apart expect money managers to lock in gains while they have them.

As I said earlier, I closed all of my positions in Apple on Friday. I think conditions are ripe for Apple to disappoint for the first time in close to five years. If I’m right, I fully expect the backlash to be violent. Apple’s previous resistance was at $270 so I’m using that as my interim price target, roughly a 15% correction. Right now companies like Apple and Google are holding up this market, but if they break it is going to be a very rough week. Volume in Apple on Friday was almost 33 million shares, better than 60% above its average trading volume.

I’m viewing this as a capitulation day and positioning myself to the downside. On Friday I purchased a sizable quantity of Nov $52 puts on the QQQQ based on my rationale above. Apple has a 20% weighting in the Nasdaq 100, so if the earnings report disappoints it will be reflected heavily in the quad Q’s. I should be clear, though, that my bearishness on Apple is only temporary. If Apple does retrace to the $270 level, I will be opening positions in the Jan $2013 LEAPs as I recommended in my previous series, The Future of the Mobile Wireless Device Market.

Disclosure: QQQQ Nov $52 puts, no position in AAPL