It turns out that the Steve Jobs leave of absence was just a blip on the stock radar screen. AAPL is trading according to schedule, as it otherwise would have, with or without Steve's news. Investors do love Steve, but it looks like they love the company he has built even more. The Apple ecosystem consists of the best retail, the best operating system, the best smartphone, the best tablet, the best app store, and the best operations in the business. We all recognize that Steve is talented when it comes to product vision, but it turns out he might be even more talented when it comes to building a company.
Take one look at Pixar and you’ll see what I mean. Steve bought Pixar for $10 million and sold it for $7.6 billion. Does anyone think that Pixar's success was a result of Steve's expertise in CGI animation? Do we think that Steve was the secret animator or writer behind Toy Story and Finding Nemo? Of course not. Instead, Steve contributed in other ways. He was able to squeeze every last ounce of creativity from the Pixar team just as he has done with Apple. He was able to identify the direction that the industry was headed and demanded that Pixar be ready for it. Steve sold Pixar in 2006 and the company that he rebuilt has continued to thrive in his absence because of the model he left behind. Investor reaction to Monday’s announcement tells us that Wall Street anticipates the same kind of continued success from Apple.
Tim Cook kept referring to ‘Apple’s magic' in the earnings conference call; I propose that Apple’s secret ingredient is much more than just Steve Jobs. It seems to be the process of innovation that he has instituted. Apple takes its time in product development. Apple knows that it had to say no, no, no and no again before the iPod, iPhone, or iPad were ready for release. Apple knows that innovation doesn't arise from the consumers themselves, it is more of a republic-style process in which talented professionals relentlessly strive to push the boundaries toward product perfection. Apple has become the master of simplifying the complex.
Apple’s DNA is creating intuitive software that seamlessly integrates with sleek hardware. The App Store model of software distribution has set the stage for ten years of hardware implementation innovation. Apple owns the hot platform of the next decade and investors are confident that they will be able to continue the growth trajectory.
As far as we know, none of the Apple products began as visions in Steve's mind, rather they came into existence after evolving through the scrutiny of Apple's process. It is very possible that Steve's greatest gift might be his ability to build a company. If this is the case, then Apple stock will continue to rise long after Steve is gone. Cook said in the call,
That's part of the magic of Apple and I don't want to let anybody know our magic because I don't want anyone copying it...the team here has an unparalleled breadth and depth of talent and a culture of innovation that Steve has driven in the company, and excellence has become a habit. And so we feel very, very confident about the future of the company.
I completely agree with Wall Street’s initial assessment of Apple, with or without Steve Jobs. It’s refreshing to see an investment environment grounded in rationality rather than fear. Life will go on, and as I mentioned in the opening paragraph, AAPL is trading according to schedule. Despite the huge earnings beat, the stock has been unable to hold a price point above the $348 high, which is just as we expected.
Apple stock doesn't go up in a straight line. The fact that Apple didn’t get a $25 lift from earnings is not good for the rest of the market as Apple has now set the tone for earnings season. If Apple doesn’t get rewarded, nobody will. With 81% of the portfolio now in cash, we are content to sit back over the next few weeks and await more favorable entry points just as we had planned.
This month has been good to us. We sold the 8% allocation of AAPL February 2011 $310s at a 41% gain, we sold the 5% allocation of AAPL January 2013 $350s that were purchased on 11/4/10 at a 7% gain, we sold the 14% allocation of AAPL January 2012 $280s that were purchased throughout 2010 at a 141% gain, we sold the 15% allocation of AAPL January 2012 $310s that were purchased on 11/24/10 and 12/6/10 at a 6% gain and we sold the 10% allocation of QQQQ that was purchased on 1/3/11 at a 3% gain. Sure, it would have been nice to have sold in the $340s on Tuesday rather than the $330s, but when you’re in the mode of protecting gains, we were thrilled to get out with these kinds of returns intact.
Our top priority will ALWAYS be to manage the downside, and in the case of Steve's announcement, we did exactly that. I’ll remind you of my favorite all-time statistic. $10 invested in a buy and hold total return strategy back in 1928 would have produced $17,020 by the year 2000. If you had missed the top 30 performing months during those 72 years you would have only ended up with $240. However, $10 invested back in 1928 would have turned into a staggering $1,864,400 by the year 2000 if you had missed the 30 worst performing months during those 72 years. Managing risk and getting out of the market during the worst times is the real secret to big gains. Such a process is definitely a delicate art form that few have mastered.
From this week's action we have learned that the Steve Jobs premium was priced out of Apple stock during the four health related selloffs in 2008 and 2009. Any selloff that we see over the next month is the result of normal Apple trading patterns and should not be confused with any kind of long term change in investor sentiment. Apple growth will continue to accelerate thanks to the fact that Steve has been developing his succession plan all along. The succession plan is more about the process of innovation than it is any particular person. And just like everything else at Apple, that succession plan has been and will remain Apple's secret.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.