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Why I Think Apple is a Neutral or a Sell

10 September 2009 1,512 views 7 Comments

Disclosure: Yesterday I unloaded all of my Apple shares

With my disclosure you can guess that I think Apple is a sell. While it is a sell for me, it might be neutral for you. Though you might wonder why I sold considering that I have previously said, “Apple, Apple, Apple”. As I have said in the past I will not play pump and dump thus am plyaing with open cards.

So why have I changed my opinion on Apple? For starters I actually still like Apple the company in general. Though what I don’t like are the valuations. At 32 PE Apple is completely overvalued. Apple is saying that next year growth will be in the 18% range, thus a fair price would be 18 PE, which is half the price more or less.

The problem with Apple are its announcements yesterday. They were a joke! Many are drinking the kool-aid saying that the new Nano is a must have item. Yyyeaahhh, rriiiggghhttt. Sure the devices are interesting, but they are interesting for Microsoft who is down in the doldrums and could not hit the broad side of a barn. They are definitely not interesting for Apple. Many have said that the big thing is Steve Jobs and that should be good enough. That in itself scares me because I thought we got over that? I thought we agreed Apple could function without Steve. I want Apple to distance itself from Steve. Not because Steve is sick, or Steve is bad, or what have you. I want Apple to develop some independence from its CEO. Just like I want Microsoft to get rid of Ballmer. I want the company to survive because as a shareholder that is all I care about. I actually think Steve is quite healthy, fit and ready to run Apple.

Where I see a red flag is the fact that the devices announced yesterday are so lack lustre. It tells me one of two things; Apple has no magic gadget, or Apple does have a magic tablet but due to Steve’s sickness all development was halted. Either way you spin this it is not good for Apple the corporation. Yes Apple will continue growing, but will Apple grow to warrant a 32 PE? No. Right now Apple is missing a netbook competitor and that market is growing leaps and bounds. Nokia is entering this market and they selling a premium device that will make entrance by Apple that much harder.

Thus regardless of how you spin things the catalyst for Apple growth and 32PE is not warranted. Does this mean I will not step in and buy Apple again? No, I will once it hits 100 USD again. Until then I will just wait and enjoy my 100% return (second time in a year).

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7 Comments »

  • Patrick said:

    Funny, earlier today I was looking at an AAPL chart and thinking it looked like an epic wave B, very short-able.

  • foxxx333 said:

    Those toying with the idea to short Apple should have considered that move when the share price was last above 170 — about a year ago. Apple’s earnings will continue to generate 25% to 35% growth year over year. First, iPhone sales will continue to increase. Second, margins on iPhones have increased year over year. Because of subscription accounting, prior years’GM will replaced with current higher margins. This alone could account for sufficient growth in reported earnings to maintain current P/E ratios. Third, Mac sales will continue to grow driven part by iPhone success (continuing halo effect). Finally, Apple is gaining sales among corporations. And don’t forget that Apple is also a software company. We need to hear from naysayers to keep us aware of potential pitfalls, but now is not the time to go short.

  • Beekums said:

    I think the biggest problem with Apple stock besides the high P/E is that most investors believe that Steve Jobs is Apple. Even if Apple is completely functional without Jobs, if he leaves Apple then the stock will drop. I think Steve Jobs needs to have a clear succession plan and delegate some responsibility so that investors can have confidence in the company when he leaves.

  • Christian (author) said:

    Would I short Apple? No, but then again I don’t play the short side. Unless I am selling premium.

    Regarding sales and Apple. I don’t disagree that Apple will continue to sell, but not at the brisk pace that they have been. Look at what happened to RIMM. Pretty good earnings for any company. BUT for a high flying tech company not enough. RIMM was hammered hard. I was long RIMM, and sold at a slightly higher level than today, and still made out with a 50% profit. Am I pessimistic on RIMM? Not really… Just that the price levels are not warranted.

    Will Apple earnings be good? Probably. Good enough for the market? There I wonder.

  • Patrick said:

    We have very different attitudes toward trading. I´m of the camp that you never sell options and buying gamma is the best long-term strategy. I also love playing the short-side, particularly in futures where I can margin through and am not limited to 100%. Different strokes.

  • Christian (author) said:

    Yes different strokes. Actually I have tried playing options from the long side and have to say I actually hate it. I truly do prefer the short side.

  • Patrick said:

    My favorite money management method is reverse pyramiding using fractal trend-breakout signals to add on, so the starter position is the only one where discretion and tape-reading apply. If I’m not trying to be early or I want to play multiple markets, for example in late 2010 or 2011 I’m going to want to follow trends in most commodities I imagine, then I’ll buy a small deep-out options position as a finish line and another small one nearer the money as something to actually exercise should the thing manifest, that way I don’t have to manage all these petty stops when the given market is still bottoming or topping in the other direction.

    But I can understand why you like the short-side psychologically. As the Beatles said: “tiiiiiiiime is on your side, yes it is!”