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Let The Accumulation Begin
January 20th I sold my Apple stock, purchased in the September sell off, for $119 a share. I was besieged by my Mac friends who thought I made a big mistake. They believed the stock would soar immediately and go much higher. And so did a wishful part me. It seems only fair that AAPL’s price should always rise! Selling a high flying favorite is the hardest part about being a stock trader. As a stock soars higher and higher on waves of optimism, it’s human nature to get caught up in the euphoria and to imagine the ecstasy will continue. With Apple it’s an emotional issue as well, I love my Macs as much as the most loyal Mac fanatic and would never consider buying a PC. For the life of me, I don’t know why everyone doesn’t want a Mac. But that’s not the issue. Investors and traders have to be cold as stone when it comes analyzing an investment or they’ll wind up as a more objective player’s lunch. The stock market is the modern world equivalent of the jungle and natural selection still has real meaning on Wall Street. It’s no secret that the whole PC market – excluding Apple – has been in trouble for the last year. Unit growth surged 37 percent in 1999 for the PC vendors as a whole, while revenues only grew by 9 percent. The PC industry is ill and it’s fair to wonder if this plague will eventually extend into Apple’s business. Selling your favorite means admitting that things aren’t as insanely great as they could be. Of course, much of Apple’s weakness is temporary and due to a number of factors beyond Apple’s control. The tech stocks are correcting, while bond yields climb. PC stocks have fallen out of favor with growth investors and at these heights the Nasdaq is oxygen deprived. Like every Bacchanalia, there is a morning after. Eventually, the Nasdaq investors will have to pay for this party with one heck of a hang over. On the other hand, nimble traders will attempt to dodge any downdrafts. Speculators and Investors. More and more people are going online to trade stocks. The most important thing one can do upon entering the equity markets is to determine what your goals are and what level of risk you are willing to endure. Are you an investor or a trader? As I pointed out last week this is the worst time in years to be a new investor to the tech stocks. There is very little headroom left for these stocks to grow into and plenty of air underneath their high-flying prices for them to fall. Wait for a correction to jump in. However, in this volatile sideways moving market, trading stocks can be quite profitable if you already have some experience, are ready to except painful stop loss moments of judgment and can stay out of the margin honey jar. Most of the flames I received over my decision to take profits in Apple came from people who don’t grok the difference between trading and investing and interpreted my bearish criticism of Apple as a static long term outlook. Nothing could be further from the truth. Fred Schwed, an old time Wall Street wit, is quoted in one of my favorite books of 1999, "Devil Take the Hindmost", as saying, "Investment is an effort, which should be successful, to prevent a lot of money from becoming a little." Investing is not gambling. "The first aim of an investment is the preservation of capital." Mr. Schwed sarcastically goes on, "Speculation is an effort, probably unsuccessful, to turn a little money into a lot." Now we’re talking trading and that describes almost everyone who is dabbling in tech stocks. If you buy Apple stock today, still near its all time high, imagining that you are a conservative investor, you are fooling only yourself. Buying Apple now means you are "speculating" it will go higher. You are playing the odds. The first rule of gambling or speculating is to use money you can well afford to lose. Don’t let the lure of cheap margin loans from some online broker guide you into catastrophe. Why is Apple Tanking? Here’s why. The insanely great earnings of the fiscal first quarter were well anticipated by investors worldwide. Everyone saw the same uptrend in Apple sales unfolding and piled in through out last autumn. The good earnings news was built into AAPL’s price by the time of its announcement. AAPL’s price dropped after the announcement sanctifying that old cliché – "buy on the rumor, sell on the news". The price volatility in AAPL need not have been so harsh except for the disappointment of Mac World. Unfortunately, as upbeat as MacWorld in San Francisco was for the entranced attendees, it lacked any insanely great news to give investors something to hang their hats on beyond the cold winds of the seasonally slow PC sales upon us. Then there was the one-time compensation package for Steve Jobs, which opened a Pandora’s box of hot issues. But we won’t go there – I covered it in gross detail last week. Suffice it to say that the granting of options on 6.2 percent of all outstanding Apple shares to Steve Jobs hasn’t helped the stock price. As a rule, investors take today’s givens (not today’s wishes) and extrapolate a range of scenarios for 12 to 18 months out. Many cautious investors have built scenarios which show declining iMac sales as the market becomes saturated with little else concrete on the horizon to run with. Of course, those familiar with the company may speculate that Apple will bring to market some great new hardware in that time frame, but nothing is certain at this point. Likewise, momentum players have fled Apple like a burning building since their time frame for a return on their capital doesn’t extend past the coming light sales season ahead. There are more promising market sectors in the short term. Forget OS X for now, the big phase shift in the Mac OS is as scary to investors as it is promising to end-users. Finally, don’t forget that the Motorola and IBM Power PC alliance isn’t keeping pace with the Intel/AMD world, adding some uncertainty to Apple’s future. Did I mention that sooner or later the slow-to-the-punch PC vendors are going to figure out why consumers love the iMac so much and do a Wintel rip off that really will bite into Apple’s target market? It’s interesting to note that last year at this time Apple’s stock flagged for many of the same reasons. The difference is that we knew that the so-called consumer portable (iBook) was in the works. This time around there are few credible rumors afloat of significant future hardware innovations. Upbeat Mac Scenarios. Apple should continue to increase unit sales in 2000. Revenues and profits are growing. Apple’s margins are the highest in the industry. The company is flush with cash so it can undertake whatever expansive new marketing forays Cupertino deems necessary. Someone pointed out to me that Apple made over $6.00 per share in the first fiscal quarter, if you count the one time paper gains from Akamai and Arm Holdings. The management team, in spite of my nit-picking, is world class and has delivered top-flight results so far. Steve is back for good. There are indications that Apple has something big planned in the way of marketing efforts this year. Most importantly, Apple can and must eventually cough up from the bowels of its incredibly shrinking R&D groups some insanely great new hardware. Given Apple’s three for three record it’s not hard to imagine their next creation will also be a post-Bauhausian masterpiece of elegance, utility and popularity. A handheld announced the next Worldwide Developer’s Conference in May would do the trick. Likewise, OS X–which will probably be greeted initially with some skepticism from non-techie investors–is really a just-in-time savior for the platform. Most knowledgeable experts on the subject expect OS X to rock with consumers and the pros alike. Once investors understand how OS X works, OS X could become yet another driving force for the stock price and expanding market share. Long term I’m still positive on Apple, but short term we are in for some choppy seas. Should you buy AAPL? I don’t give advice. All I can do is honestly tell you what I am doing. Today, I’m cautiously accumulating the stock in the $100 range but I’m not going to blow more than 33% of what I would like to spend on AAPL at these levels. I expect the stock to bounce after the Fed meets later this week and I want to be in on the ride to $110 or so, but then I’m out. If the $100 support level breaks down, and I expect it eventually will without intervention, I’ll want to have cash left to double my position if we go back into the $80s later this quarter. If I’m wrong, and the stock regains momentum on some great new development, then I can buy more on the way back up. The scenario I’m working with is for a market bounce once the Fed slaps the economy with the expected interest rate hike this week. Apple should bounce too, but expect Apple to continue to show weakness, soiled unfairly by the rest of the lack luster PC sector this spring. It’s hard to imagine new highs till Apple’s product strategy evolves further. Perhaps by MacWorld NYC in July we will clearly bust out of the current trading range. Three things could change this forecast. One, the stock market might stop obsessing about interest rates long enough to reward companies like Apple that have stellar earnings. This will require that the market have the ability to discern the difference between PC manufacturers, rather than dissing the sector as a whole. Two, the market could experience a flight to value stocks (those with low PE ratios) as interest rates climb. Normally this would imply leaving the high tech stocks but in today’s digital world you can’t leave tech stocks entirely so perhaps a hybrid category, the "value-growth" stock, will emerge as a popular option among institutional investors. Apple fits this bill. Three, investors could realize that the overheating US economy is fueled largely by consumer spending and that Apple, of all the PC vendors, has the most to gain by consumers flush with cash and aching to splurge on pretty toys. Combine any of those possibilities with some positive hardware news out of Cupertino and you have the makings of a revitalized uptrend in the stock. Your comments are welcomed. |