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Apple Is Now For Traders, Not Value Investors!

|Includes: Apple Inc. (AAPL)

I'm constantly amazed at the The Stock Trading inordinate amount of time the financial media devotes to discussing the stock of Apple Inc. (NASDAQ:AAPL). I understand why since it was the biggest wealth generator of this bull market when it was over $700 and it is one of the widest owned stocks it has been it deserves much attention. The subsequent 45% decline from over $700 to $393 recently erasing hundreds of billions if shareholder value is definitely one of the biggest news stories and deserves huge coverage. What irritates me is the endless question almost always being asked is; Is Apple finally a buy at the $650 price level, then $600, $500 price and then finally recently at under $400. With almost any other stock that just got dramatically ahead of its fundamentals, became overpriced and finally got to the point where there was no one left to buy it. At that point the stock begins a long decline and most investors become more rationale when such a massive growth stock reverses and the momentum shifts to the downside. Apple though has been different than almost any stock I have seen in my twenty plus year career in that investors are almost incapable of being objective about the stock. The reasons are numerous but I think it is because number one, so many people have memories of their previous spectacular gains in the stock it clouds their present judgment. The second reason clouding their objectivity is they use all their products and think just because others like themselves are locked into their "ecosystem", they always will have the same pricing power and profit margins going forward.

I have bad news for the value investors who want to buy Apple for a longer-term hold. While it might be a stock that is still able to be bought at extreme selling panics and then sold for a 5-10% subsequent gain short-term, buying it hoping the stock will make a 20-25% move back to $500-525 in my opinion is a fool's game. The reason is very simple; the company is overwhelmingly dependent on the IPhone for its profits and margins. Yes they make money in tablets and some other products but they get about 65% of profits from the IPhone. The fact is they have smartphone profit margins of about 40% vs. Samsung 25% profit margins. Since their product is now no longer the leader, their market share and their profit margins will continue to fall, not rise. That is why there gross margins have declined for four quarters now and will continue too. Not only will they continue to fall but as you can see by the wide difference of 15%, they probably will continue to fall substantially, not incrementally.

That is why the company has finally reversed itself so dramatically and announced a large dividend increase and a massive stock buyback. You would be surprised to find out that it is very important that Apple keeps it stock price up because they still use options to supplement compensation to make it appear they are more profitable than in reality they are. This is common in technology companies and most buybacks in the sector are just a sham designed to offset dilution from exercising stock options. It basically is masking their true operating expenses for labor for accounting purposes and is legal but for the most profitable company on earth is petty. I think the company also finally came to the realization that without massive buybacks, their earnings would decline substantially.

I'm neither long nor short the stock and that is one reason why I can actually be more objective. My main point about the stock for an institutional investor or a longer-term value investor is they should look at more than the basics that make it seem like a company trading at under ten times earnings with a balance sheet that screams buy at these levels. The stock will probably still produce good trading opportunities for more nimble traders but for a mutual fund who makes decisions in days or weeks there are probably better opportunities. As a value investor when company fundamentals are in decline, you must wait for time when the value offered is so overwhelming and the negative sentiment is so extreme, like Hewlett Packard or Intel last December or your value investing can be very difficult and frustrating.