Daily Archives: January 10, 2013


Investing in Apple: A Two-Story Stock (Featured Article)

The article featured below was contributed by Fernando Olivares, a friend and fellow Apple investor. Fernando runs a website focused on day- and swing-trading Apple stock and options. His site, aaplspreadsheet.com, is highly recommended. Fernando utilizes a series of proprietary methods to determine likely near-term price moves. You can reach him at comments@aaplspreadsheet.com or via Twitter @aaplspreadsheet.

Investing in Apple: A Two-Story Stock (by Fernando Olivares)

January 10, 2012 (7:45 pm)

Apple (AAPL) bulls have been scratching their heads and licking their wounds ever since the stock finally broke the $700 barrier in mid-September. This extremely bullish price action (a very impressive 71% rally YTD at that point) signaled a top in the stock. We’ve been in a very severe downtrend ever since.

What we need to take from these actions are two things:

  1. The stock is not the company, and
  2. The company is not the stock.

Let’s run some numbers to get a sense of what I’m trying to convey here:

  • Apple’s LTM P/E ratio is currently 11.71x
  • Microsoft’s (MSFT) P/E ratio is currently 14.28x
  • Google’s (GOOG) P/E ratio is currently 23.18x
  • eBay’s (EBAY) P/E ratio is currently 18.04x
  • Amazon’s (AMZN) P/E ratio is currently 3,541x (yes, this is correct)
  • Facebook’s (FB) P/E ratio is currently 290.53x
PE Comparison

Click to enlarge. Excludes Amazon in order to keep the scale reasonable.

A P/E ratio by itself may be a weak way to measure a company, but humor me for a second. Between those companies mentioned, Apple is the least valued. This means that the market believes that Google or eBay should see higher growth than Apple. Also, the market believes that Facebook has an extremely bright future.

Now, let’s leave the market for a second and look at the facts. In FY2012, Apple earned $41.7 billion in profits, while the other 6 companies, which are considered tech giants, earned $34.4 billion in combined profits. So it is a fact that Apple is the most profitable and by quite a large margin. Note that three of those companies are software companies, which are usually insanely profitable.

This shows you that there is a very clear discrepancy between Apple the company, and AAPL the stock. The company, in general, is loved all over the world. Their product releases cause waves in the tech pond. People line up to buy their products, even when they already own the previous version. There is a devotion towards Apple products. It is clear that the stock is undervalued when it comes to the actual numbers, but this does not matter to the market, and the market is always right.

I know some people lost a lot of money because of their relentless faith in Apple. Their mistake is that they are unable to distinguish Apple from AAPL. The company is absolutely demolishing the competition, especially when it comes to profits. Phil Schiller just confirmed that they own 75% of the profits in the mobile space. Everyone is calling for Apple’s demise (and looking Samsung’s way) but it is unlikely that it will come in the next few years.

I believe that all of this information is not reflected in the current stock price because it is extremely difficult for us to understand this monster of a company. Nobody can believe that AAPL, a company that seems to make simple products, can keep growing. The constant growth that the company has experienced is mind-boggling. Of course we may see a slower growth this quarter or next, but what happens when they sign a deal with China Mobile? There are 700 million subscribers there. It’s simply too difficult for the investor community to understand that the biggest company in the world continues to have a lot of room to grow in both the smartphone and tablet industries.

The market is pricing Apple at a low valuation because a majority of participants do not understand its strengths. Do not fight it. What Apple bulls need to do is try to analyze when the market will again realize that Apple’s stock price is lagging. When will the market decide that Apple is a good investment again? My best guess is after January earnings (January 23). Another solid quarter and the stock might play catch up with the company.

For now, all I can say is this: If you are getting tired of Apple as an investment, it may be that you don’t understand it, or that you are not taking advantage of its volatility. It is a beast of its own. It’s basically Ajab’s white whale. Don’t expect it to be easy to profit from. I’m not saying that it’s impossible, but you need to be able to separate the successful company from the successful stock (remember, the shares still gained over 20% in 2012).

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Written by Fernando Olivares (aaplspreadsheet.com). Follow him on Twitter @aaplspreadsheet.


The Outlook Remains Bearish

January 10, 2013 (11:00 am)

The market got a boost this morning with better than expected trade data out of China; however, it fell far short of making a decisive new high. For that reason, we’re sticking with our bearish outlook for the intermediate-term. We took profits on our near-term options in the Multi-Strategy Portfolio (we sold our HOT and SODA February puts for 30% and 7% returns, respectively) in order to push out our nearest options expiration to March. This should give us plenty of time to see our thesis prove out. While our expectation for a reversal in the broader markets remains strong, we don’t want to get into a situation where theta decay (the time value priced into the options) affects our positions. Allowing over two months for a reversal is the prudent path. We are also OK sitting in our short positions until the anticipated reversal comes to fruition.

We should note, though, that we continue to challenge our thesis. We are constantly looking for new information and analysis that disproves our thinking. If our conviction diminishes, we will not hesitate to get out of losing positions.

SPY (S&P500 Index)

The SPY formed a new high with the gap up this morning, but as we discussed above, it didn’t break decisively above the previous high set early last week. With the subsequent decline through the early morning, it’s starting to look like a double top. Interestingly, the target price of a double top reversal here is very close to the gap fill from the “fiscal cliff rally”. Whether it turns out to be a double top or not, this attempt to rally and lack of follow-through is not what bulls want to see here.

SPY

Broadcom. We took a short position in BRCM this morning as it failed to reach the upper trend line of a rising wedge it has formed since early November. You can also see buying momentum slowing, as it reached the exact same top ($35) from early January on a lower RSI. This could also be a double top in the forming.

BRCM

Chipotle. To update our CMG analysis from yesterday (we took a short position as it broke below its lower trend line), the shares rallied briefly this morning. This rally brought the shares back up to the lower trend line, but it again failed at that point. This is fairly typical price action. You often see a re-test of a trend line after the shares break it to the upside or the downside.

CMG

Gold ETF. GLD is on our watch list. It has been forming a falling wedge since early November and is now reaching the upper trend line just as it enters overbought conditions. We may take a bearish position on a failure here, or conversely, a bullish position if it decisively breaks through to the upside. Either way, we’ll be watching this closely.

GLD

Google. We took a short position in GOOG this morning as it reached the upper trend line of a rising wedge it has formed. The shares created negative divergence, rising to a higher price on decreasing buying momentum.

GOOG

Netflix. This is something we’re watching for now. NFLX is bouncing off the lower trend line of a well-defined rising wedge. We’re looking to take a bearish position on a breakdown.

NFLX