Apple Corp (AAPL)
Many people believe that to be short a stock, traders must believe that the company has fallen upon hard times and that sustainability is in question. However, there are often opportunities to make money shorting good companies in order to take advantages of pauses or retracements in the stock of said firm. This is not a qualitative judgment on the operations of the company in question but instead a perspective on the action of the stock which may or may not accurately track the performance of that company.
Such is the case with my short position in Apple Corp (AAPL). Over the past several years the stock has had an incredible run reflecting the turnaround in the corporation. New innovative products and shrewd marketing efforts have turned this niche company into a powerhouse with a cult following. Sales from its iPod media player have nearly eclipsed sales from its computer division and new excitement over the iPhone has driven the stock higher. This new market for Apple has the potential to drive sales through the holiday season and a lower pricing schedule should make it more accessible to a broader group of potential customers.
The shareholder base for this great company is very much like its customer base. The group is an eclectic mix of cult followers who are sometimes just as likely to buy the stock through an emotional decision as through careful logic-based analytics. Many who hold the stock have picked it up in the past 12 months and have realized quick stellar gains and are likely to hold a very optimistic view of the company’s prospects. Apple has been consistent in beating analyst views for quarter after quarter, and if this trend were to change, there are a lot of emotional, momentum type investors that would be more likely to sell shares in disappointment.
An overall trend in both domestic and international markets is the repricing of risk. As investors look at future targets for stocks, they are becoming more aware of the risk of whether the investment vehicles will reach these targets, and what what return they should receive for taking that risk. As a purely hypothetical example, if an investor expects the stock to be worth $200 in 4 years, and believes the risk is such that he should be compensated 15% per year, the present value of the stock should be $114.35. This explains why logical investors could sell a company that they believe in based on long-term expectations, risk levels, expected return, and current value.
Apple’s stock has a history of pauses along its impressive run. Last year the stock peaked in January at 86.40 and took 6 months to work through its pullback hitting a low in July of 50.16 for a pullback of 42%. Currently we are less than 2 months into the retracement and only 7% below the previous high (although at the lowest point we reached a 25% pullback). Since the overall market environment is one of uncertainty and rebalancing, this particular name has a better chance than most of being hit with lower prices. Although I carry great respect for the company and for the work that Steve Jobs has done, I do not believe the stock is in a good place to take the risk of owning it for now.
FD: Author has short position in AAPL
Additional Reading:
BloggingStocks discusses potential problems with AAPL’s partnership with AT&T
Ant and Sons discusses Apples quest to grab larger market share
Jeff Matthews discusses some non-traditional potential strategic ideas.
Question: How many brain cells does it take to correctly spell the name of a company you’re shorting?
It’s Apple Inc. (AAPL), you imbecile.
September 17th, 2007 at 4:07 amthis is a numbers game, and its the numbers that need to be precise at all cost, even if spelling is compromised. suggestion Jack Crapa.. go back to Borders.
September 17th, 2007 at 9:02 amalso Jack, something you can spell but will never have …. CFA.
September 17th, 2007 at 9:06 amthanks Jack - you’re absolutely right - my bad.
September 17th, 2007 at 9:10 amFirst of all, when someone responds with such a childish response as our friend Jack, don’t bother answering. We all know what stock you are talking about even if you called it Apple Computer
That said, while I think there are far better things to short, on valuation metrics this is a pricey stock. Not withstanding external shocks to the market that will bring all/most stocks down, I will be curious to see how it plays out.
I think AAPL will continue to surprise people and when this disclosure of how much they are getting from T really shows up on their bottom line (subscription revenue), with gross margins to boot, I think it will just be another surprise… along with the iPod Touch… along with the iMacs… and Powerbooks. Only iPods I think will disappoint (the ‘classic’)
I outlined some of this here - arguing for a Gilette model, razor vs shaver or HP model printer vs ink cartridge. This is how I see iPhone
http://fundmyfund.blogspot.com/2007/09/apple-aapl-comments.html
Last, I’d argue Apple is becoming a brand to the masses, a cool brand and we cannot underestimate the power of cool when every 7 to 22 year old (power demographic) wants Apple product. This helped Nike for the better part of 2 decades achieve and keep premium valuation (and is what is pushing Under Armour along the same path)
September 17th, 2007 at 11:41 amwow some serious upset people on Seeking Alpha
I guess you touched a nerve
Tough to be a short or realist.
I can’t wait for your analyis of Baidu and RIMM! hah
September 17th, 2007 at 6:19 pmanother pair of stocks with similar investor bases.
Sure hope you were short on Apple through the first quarter of this year. That would have been really smart. I was thinking about shorting during the tech melt down but decided not to for the most part. Just a few puts here and there.
May 27th, 2008 at 12:22 am