Daily Archives: January 16, 2013

Pacific Crest Securities Blew It

January 16, 2013 (6:00 pm)

Can we agree on something? Pacific Crest Securities blew it this morning and have forever discredited themselves. They recommended to their clients that they sell Apple at the absolute low. They were shaken to the “core” (forgive the pun) and downgraded shares of Apple on a faulty assumption. In the short-term, Apple ≠ AAPL. But in the long run, they are one and the same. Technical’s may run the near-term price action, but fundamentals eventually take over.

Pacific Crest analyst Andy Hargreaves is “downgrading the stock to ‘sector perform’ giving it a price target between $440 and $550 for the next twelve months. The high-end market for smartphones and tablets are going to be saturated sooner than expected which will lead to poor growth for Apple.” Further, he explained that “demand for incremental hardware improvements is waning and [he doesn’t] believe people will continue to upgrade to a new iPhone.”

Right. So, where do we start?

PRICE TARGET: First, let’s take a look at the price target. He forecasts a $110 price movement over the next twelve months. This is extremely unlikely. We’ve been looking at quarterly volatility over the past few years, and the median price move in any given quarter is 3.3x the trailing twelve month P/E. Currently that P/E stands at $44.17, implying a $147.50 price move in any given quarter. Forecasting an entire year’s price range based on 2.2x P/E is completely without merit.

GROWTH OUTLOOK: Second, let’s briefly look at the smartphone and tablet markets. Over the past year, Apple has sold a total of 125 million iPhones and 58 million iPads globally. Fortune reports that China is estimated to have over 500 million smartphone users by the end of 2013. If Apple is able to capture just 10% of China’s estimated smartphone users in 2013, that would just about equal its entire 2012 iPhone sales. While that may not be a realistic goal, the point is that this single market illustrates the unbelievable growth opportunity ahead. Not to mention the fact that iPhone’s have barely started moving into India and Brazil. Besides these enormous emerging markets for new growth, let’s also look closer to home. Reports suggest that approximately half of all mobile users in the United States have a smart phone. With subsidies provided by the carriers allowing users to purchase an iPhone 4 for $0.99, what’s to stop the non-smartphone users from upgrading? Lastly, smartphone shipments are expected to top one billion in 2013. What share will Apple have?

Now let’s take a step into the tablet market. We’re going to approach this a bit differently. Forget about emerging markets. Let’s look at potential uses and users of tablets that haven’t historically used a powered device. Think of the global demand for a $329 consumer device that delivers a true computer replacement experience for a vast majority of the population. Now add students bringing a tablet to school in lieu of a heavy backpack filled with books. And doctors across the world replacing charts with a small, secure, wireless device (no more worrying about terrible handwriting). Then there’s the already evident demand from retailers looking to replace cash registers with iPads. Demand for this device is and will continue to be enormous. We don’t care if they sell more iPad mini’s than iPads – and we believe they eventually will. The higher volume will more than make up for the lower profit per unit. Especially because it locks users into its…

ECOSYSTEM. Andy also argues that demand for incremental hardware improvements is “waning”. He’s missing the point, at least with smartphones. Consumer behavior has been shaped by the telecoms. AT&T, Verizon and a majority of other telecoms have taught us to upgrade our phones every 18 to 24 months. They pay us to do so. When our contracts are up after two years, they deeply subsidize the newest phones. And we buy them. Let’s think about this for a moment from a purely anecdotal point of view.

For those of you living in New York, it’s likely that you don’t see as many iPhone 5’s as you would have expected on the subways and walking around the city. This might seem counter-intuitive, but we believe it’s a bullish data point. What we do see is an enormous number of older iPhone’s – namely the 4 and 4S. What’s going to happen when their two year plan is up? They’re going to get the newest iPhone. But this won’t happen immediately. And that creates a recurring revenue stream for Apple going forward. We’re locked in. The headache, heartache and expense of switching to Android or Windows is an enormous incentive to simply upgrade to the newest handset. But maybe not when it first arrives. When our contract is up. I’ll leave you with this thought: It’s the ecosystem, stupid. Let us know your thoughts.

Apple’s False Breakdown

January 16, 2013 (12:30 pm)

We posted an important Apple chart on Monday. It showed that the move to $497 validated the falling wedge that we’ve been watching closely over the four-month correction. Yesterday’s sharp drop forced shares well below the lower trend line. What does that mean? Is the pattern now invalid? No – this breakdown simply comes with the territory when trading. False movements (whether they be breakouts to the upside or breakdowns to the downside) are accumulation patterns. It’s a way for market makers and “smart” money to accumulate positions by taking out the stops before showing their hand.

AAPL Falling Wedge Update

So in a way, the breakdown yesterday was actually a bullish signal. The fact that we reclaimed the falling wedge today, after only a one day breakdown of a four-month pattern, is like a poker player’s “tell”. We expect consolidation here near the $500 level into the weekend, which would allow the maximum amount of January 2013 calls and puts to expire worthless, before seeing a run into and following Apple’s earnings announcement next Wednesday.

Trend Lines

We’ve looked at the following chart a number of times. We find it very important when looking at trends. We broke the blue trend line for the first time in 2013 yesterday. Today, we firmly reclaimed that trend line. It’s interesting to note that the RSI yesterday hit that all important 17 RSI level (green horizontal line). Each touch of that RSI level has resulted in an almost immediate $20+ rally in the shares.

The orange trend line, by the way, represents the top of the enormous falling wedge.

AAPL Trend Lines

Mr. Market Can’t Make Up His Mind

The market is becoming a bit more challenging to decipher. There are conflicting signals generated every day. We are sticking with our bearish viewpoint for the time being, but that is subject to change at any time. Let’s look at where things stand.

Intermediate-Term: The SPY gapped well above its upper Bollinger Band (not shown) for multiple days in a row after the fiscal cliff resolution. It became extremely overbought on the daily chart and the VIX (volatility indicator) plummeted. These all tend to be indications of an intermediate-term topping process. This topping process, we should add, tends to happen over weeks – not days. So we remain bearish on the intermediate term.

Near-Term: This is where it gets tricky. We’ve seen clear negative divergence with the RSI, as the prices climb on decreasing momentum. However, the SPY has also formed a pretty clear ascending triangle. These are typically very bullish patterns. When a stock tests and re-tests a level on multiple occasions, we often see it eventually break through. This triangle pattern is also known as a ‘continuation pattern’ as we usually see them precede a continuation in the previous move.

That said, the low $147-level has proven to be firm resistance thus far. What we could see happen is a brief break above the low-$147 level, bringing the shares into overbought territory, before seeing the reversal that brings our intermediate-term bearish view into play. We’re closely watching these levels.

SPY Ascending Triangle