Why We’re Cautious on Apple

In yesterday’s commentary, we cited the punk performance of Apple shares in recent weeks as evidence that the stock market as a whole may have entered a bear market.  “Apple as a barometer? That’s a big stretch,” wrote a regular contributor to the Rick’s Picks forum. We disagree.  After all, Apple is the most valuable publicly traded company in the world – bigger, even, than Exxon Mobil. Given the extraordinarily high expectations that investors (and consumers) have for the company, even a small disappointment – a downtick in sales, perhaps — could hold serious implications for Apple shares. That in turn could precipitate a major trauma on Wall Street, since so many portfolio managers owe their bonuses in recent years more to Apple’s steep rise than to any other factor.

Investor sentiment aside, Apple’s continued success as a retailer is crucial to a segment of the economy that has been devastated by competition from the Internet. As brick-and-mortar stores have fallen one-by-one, Apple’s showrooms have thrived, with lines out the door whenever new products are released. Under the circumstances, the much-awaited iPhone5 had better be stellar in every way, since Samsung will be breathing down Apple’s neck with strong new products of its own. Nor are consumers likely to be impressed by merely incremental improvements. It takes a lot of Wow! factor to get them to pay up for Apple’s relatively pricey hardware.  They are going to be even more demanding as new pricing schemes being rolled out by the phone companies effectively reduce or eliminate the subsidy that has made many smart phones a giveaway item when tied to service contracts.

Bear Still ‘Speculative’

From a technical standpoint, the presumption of a bear market in Apple shares is still speculative. Rallies have lacked their characteristic oomph in recent weeks, even as corrective downtrends have exceeded our Hidden Pivot targets.  Still, that’s nothing that a burst of energy could not cure in a week – or even in a few days, since bulls could go on the attack again with a booster-stage rally of just $10.  Notice in the chart above that that would surpass two prior peaks that occurred in early May. It may look like small stuff on the chart, but it would generate the first robustly bullish “impulse leg” of hourly-chart degree since late April. We’ll reserve judgment until we’ve seen how the stock handles these “external” highs. In the meantime, Apple should not get a free pass merely because the company and its products still generate more buzz, and its showrooms more traffic, than any other company in the consumer electronics business.

  • Rich June 20, 2012, 5:45 pm

    Android outselling iPhone 2:1 with Siri unintelligible mish mash, contrary to AAPL ads, a recipe for disillusionment.

    http://www.nytimes.com/2012/06/11/technology/apple-keeps-loyalty-of-mobile-app-developers.html?pagewanted=all

    AAPL headed south today so far with Crude, PMs and FX, despite targeting +13% on Point and Figure.

    Found covered calls limit upside and do not hedge downside…

    • Bam_Man June 20, 2012, 9:11 pm

      The option premium is a partial hedge.
      Of course it does not provide 100% protection in the event of a major move lower, but it is better than nothing.
      In the case of a range-bound stock like APPL, it has been possible to accumulate a 15%+ “cushion” over the course of the past several months.

  • Bam_Man June 20, 2012, 5:00 pm

    I own AAPL shares but I’m cautious too.
    The stock is not at all expensive on a P/E basis.
    The question is, can they sustain their margins and market share? Of course, the answer is “not forever”.
    That’s why I write covered calls every month, which have been very profitable while the stock has been in this multi-month consolidation phase.

  • gary leibowitz June 20, 2012, 4:33 pm

    If one was to look at AAPL’s chart it could cause a neck strain with its vertical move and 6 fold price rise. Its market cap is also in the stratosphere. On those criteria alone you could be nervous owning it. Now look at GOLD. I would say you should be nervous owning that metal based on the same criteria, yet not one here is arguing Gold could fall hard, or that any drop would just be a buying opportunity. It is indeed a matter of perspective. If you are convinced of Gold’s long term potential than the current price can be justified. The same holds true for AAPL.

    There are no high expectations priced into the stock. It is trading at a very reasonable 14 times earnings. Given their huge market cap the question remains have they already captured the bulk of their industries potential. There is a huge market in Asia that has yet to be realized. Most analysts do not consider this stock overvalued. Every competitor that tried to break their dominance failed. Microsoft is going to compete with the I-Pad. Will they succeed where others failed? Will it significantly hurt Apple, or cause them to lower their profit margins? Apple can indeed stumble but given their proven track record and earnings potential the stock is not overpriced. If anything I would watch Microsoft more closely for a short position. Even though they are trading at 11 times earnings their decision to enter the tablet business without a partner could be costly if they fail.

  • JH June 20, 2012, 3:19 pm

    I’ve been a Windows guy since Windows 95. Sure I’ve dealt with nearly every flavor of Unix from SunOS to Solaris to BSD to redhat, etc, etc, etc but for home use it has always been Windows. But I have been fed up recently with the constant issues with Windows and my phones that are supposed to stay in sync with mail, appts, apps, and media. These issues, whether mine alone or with my wife’s systems, have become such incredible time sinks and money pits I’ve had it. I want simple and reliable and that is what I see with my wife’s new iPhone and the iPad I gave her to placate her when I couldn’t get around to fixing her HP laptop with Windows hesitating to the point it is unusable. That iPad and iPhone just keep going and going with well-behaved apps that hasn’t required one minute of my time. Thank you Apple. Now that their products are only slightly more expensive, I am making the move fully to all Apple products as they provide a fantastically better experience without me losing any of the hair I still have left in keeping everything running as it should. Sure, the Apple software and media ecosystem insures they will continue to make serious dollars off of me even when I’m not buying more hardware is absolutely fine with me. I was spending more on terrible applications trying to keep my Windows stuff safe and running as it should.

    Samsung doesn’t appeal to me as they aren’t helping me to integrate everything into a different/better set of hardware/software and pull away from MSFT, sure Android is out there but the implementations and devices are more convoluted than even Unix/Linux. I’ll pass as I’m not a youngster with nothing but time and energy on my side.

    My point is, there are hundreds of millions of people like me that are fed up with bad MSFT products and now see Apple as a way to get out of the MSFT trap and each of us will be spending a lot of money directly with Apple and will be glad to do it.

    &&&&&

    Amen. I’ve despised Windows for 20 years and see Windows 8 as simply continuing MSFT’s process of piling more bloat onto O/S architecture that should have been scrapped a decade ago. As for the growing amount of time consumed trying to deal with Windows-related problems, the problems have become largely insoluable because conflicts with (and between) third-party applications are increasingly too subtle to be remedied by either the third-party’s experts or by Windows experts alone.

    Meanwhile, I see Microsoft as the tech world’s General Motors, circa 1968 — i.e., as moving slowly but inexorably toward bankruptcy. It will take a long time for MSFT’s competitors to put the Redmond firm out of business, to be sure, but no company that does as many things as poorly as Microsoft does can survive, let alone prosper. MSFT is dead meat in a world where the pace of innovation and technological change continue to outstrip them. RA

    • Bradley June 20, 2012, 4:30 pm

      Word.

      Plus, what are we supposed to do with all of our extra mad money anyway? Buy Ugg boots and LULU yoga wear? C’mon Rick, order up a caramel macchiato and join in the fun! Just ask Siri where the closest Starbucks is.

  • martin schnell June 20, 2012, 2:29 pm

    The real question is where does Apple growth come from (at anything approaching past growth) with carriers reducing subsidies and China basically a write off (except as a gift for mistresses and girlfriends – an iPhone as jewelry) and the overall economy at stall speed. We will see the downtick at some point … but trying to pick that point is a good way to get slaughtered.

  • SD1 June 20, 2012, 5:22 am

    What does it matter if Samsung wows the world? The money would change hands out of Apple and make its way into Samsung, wouldn’t it? If that is the case, it’s zero sum.

    &&&&&

    Come again? RA

    • mario June 20, 2012, 5:55 am

      Hi SD, I had an iphone now I have the latest HTC android, mainly because I just wanted the bigger screen. To me the android interface is just as useable and cool as the iphone….though obviously the iphone’s app world is still much better laid out and organized…Cheers, Mario

    • SD1 June 21, 2012, 3:43 am

      What I meant is money moves around. If it leaves Apple shares, perhaps it will wind up in Samsung … or the dollar or gold. Hence the “zero sum.”

    • mario cavolo June 21, 2012, 6:15 am

      Hi SD,

      I’ve often agreed with this idea, that the money moves around as asset allocations simply shift based on which asset classes are going up or down to meaningful levels in the market place, but Rick makes his case that in a type of financial crisis/crash scenarios, money actually vaporizes…

      Cheers, Mario

  • mario June 20, 2012, 5:20 am

    Directly related to musings on Apple…, let me point out the GSA MobileAsiaExpo being held this week here at the Shanghai Exhibition Center and Kerry Hotel.

    The sheer size and scope of the event boggles my mind. I have watched a parade of every kind of imaginable exhibition and ballroom event here for the past ten months with our offices just across from the hotel’s ballroom, which is also adjacent connected to the massive exhibition center.

    All such previous international conference and corporate events here were mere gatherings in comparison to the monstrosity I am witnessing this week, speaking so directly to the world of mobile/tablets/smart phones etc and their incredible impact across the world we live in. The industry will be spending 800 billion additional in continuing growth investment to keep up. I read the conference exhibition guide over a beer last night, just incredible.

    Rick, I will get a copy and mail post it to you if you like.

    Online for all to see at http://www.mobileasiaexpo.com

    Cheers, Mario