MorningWord 4/26/13: Healthy Rotation Or Failing Leadership? $QCOM, $SPX

by Dan April 26, 2013 9:15 am • Commentary

MorningWord 4/26/13:  The SPX’s strong performance out of the gate in 2013, despite early fears of fiscal cliff, sequestration and questions regarding the strength of the global recovery have made it a tad difficult for equity investors who like to buy stocks when they are “coming to them” so to speak.  After living through more than a couple booms and busts since I started trading equities in 1997, I can tell you that it often pays on a short term basis to “buy higher highs” as a trader, momentum can be a very profitable force, doing so as an intermediate term investor can be debilitating to your returns if you do not have the wherewith-all to dollar cost average.  Timing and Sizing are 2 of the most important characteristics in most successful trades/investments, but never more important than at inflection points.

As the SPX once again approaches all time highs and attempts to break above the 2000 and 2007 highs, I am just not sure on what bizzaro planet equity investors think this is a good entry point to increase their exposure to stocks or initiate new holdings.   I know, I know, where else are you going to put your money?  I am not lobbying anyone to avoid the stock market all together, I am merely suggesting that there are acceptable periods to reduce exposure, move to the sidelines or make sure that you are properly allocated across different asset classes that do not leave your savings vulnerable to what may be an emerging theme of 50% peak to trough draw-downs every 7 or so years in the SPX.

SPX 1995 to present from Bloomberg
SPX 1995 to present from Bloomberg

The above chart scares the heck out of me, maybe not because I think we are going to crash today or even in the next few months, but we are certainly likely to do it again at some point in the next couple years.  Its never different and some of the forces that have powered the gains off of the 2009 lows are not likely to remain intact, influencing asset prices the way they have of late.  At some point, probably sooner than later, the global economy will need to stand on its own 2 feet, and risk assets without embedded “puts” will not likely have the same shine as they do today.

This earnings season has been fairly interesting as it has produced a few unexpected occurrences   In tech we have seen perceived market/sector leaders like IBM, QCOM & EBAY see their multi-year rally’s stall with an inability to make new highs with the SPX, while laggards like MSFT and INTC (both stocks up 10% since reporting) have seen huge moves since what can only be categorized as lackluster results and guidance.  While bulls will argue this sort of rotation into laggards is bullish, as the market will need to see the rally broaden out if it is too make a sustainable breakout, I would suggest that it is a performance chase by portfolio managers who see little downside to taking a shot on low growth value names that have a better than average yield.

One trend of late worth keeping an eye on is the recent breakdown, from all time highs by such consumer staples and healthcare stocks like PG, BMY, AMGN & PFE.   These have been very crowded trades, and despite low growth expectations, investors have poured into them due to their defensive nature and high dividend yields. These stocks are trading near peak valuations and will need to see a lot of things go right from here on out for these stocks to continue to work.  Whether it’s healthy rotation or a sign of falling leaders will determine the direction of the next 100 SPX points.



MorningWord 4/25/13:  After all the hype, all the anticipation into AAPL’s fiscal Q2 earnings report, the stock basically ended unchanged on the day yesterday after some early morning volatility that resulted in an almost 6% range.  After months of relative under-performance and a dramatic first hour of trading , the stock appeared to find a little footing at $400.

AAPL 4/24/13 1 day chart from Bloomberg
AAPL 4/24/13 1 day chart from Bloomberg


As a trader who melds both qualitative and quantitative inputs to inform a thesis prior to event, in hindsight  the  options market implied move might have been the most out of whack of all of the fairly whacky expectations into Tuesday’s print.  Options market makers were expecting a move of about 7% in either direction yesterday, or in market cap terms, about $27 billion, to further put that in context a move equal to YHOO’s entire market cap.

For those looking for just the right price, or spot in time to finally get back in AAPL, yesterday’s price action should be a fairly encouraging sign that some sanity might have sunk back into a stock that has defied logic for more than a year and a half.  In this space yesterday morning I went through a laundry list of reasons (below) why the stock might not be done going down, and nothing has changed from that point to cause me to think otherwise, except for the fact that the stock did not have a dramatic, move one way or the other.

The crux of my bottom thesis is that AAPL investors need to capitulate, that we will need to see a massive crescendo on volume that could set up for a V reversal.  The company’s current fundamentals stink, plain and simple, with few identifiable catalysts for the next 3 to 6 months (company did just announce the dates for their World Wide Developers Forum in June which usually causes product speculation) but at some point very soon, investors will discount the now and think to the future.

But there is one fact that I might have inconveniently ignored, the little tid bit that the company raised their share repurchase authorization by $50 billion dollars to $60 billion over the next 3 years, starting this month. This authorization is the largest in corporate history and represents nearly 16% of the stocks current market cap.  AAPL’s entrance to the AAPL’s shares market should have a vol dampening effect on the shares and could be just the thing the share ownership transition from growth to value needed, the ultimate value buyer of last resort!

While I am sticking to my guns for now, I still want to see some sort of weakness down towards the $350-ish range (which would place the stock at a full blown 50% re-tracetment from the all time highs, which may be getting a little to cute.   As usual, Josh Brown, on his blog, The Reformed Broker,  spelled it out for the rest of us who at times like to over-think things, “Sometimes this game is easy”.  From his post yesterday:

Apple is one of those easy decisions right at the moment.

The company has just informed us that they plan to return $100 billion dollars to you, if you are a shareholder, over the next 36 months.

This is an unheard-of sum, the Exxon dividend-buyback combo of a few years back is the only corollary.  This comparison is important because Exxon is not growing but it has treated you very well over the years if you simply sat back and collected your gains and payouts from the boring business.

There are muted expectations for Apple’s growth rates and innovation prowess and profit margins. Everyone is aware that it is not 2006 anymore. The hot money is no longer in control of the equity and $300 billion in market cap has already been shed. People talk about this company as though it’s dead. As Jay Yarow reminds us, at $43 billion in quarterly revenue, it is anything but. For perspective, Google does $50 billion in revenue for a full year.

I don’t know if Apple’s next product launch with be sexier than Samsung’s. But I do know that it doesn’t matter, not anymore. Negatives are well-known and small positives will be surprises now. There is still downside risk, but this is true of any stock so get over it.

Most of the time, the right thing for investors to do is not easy to determine. This time it is easy. If you stuck it out with Apple over the last year, you don’t sell last night’s news. You stick around.

So I’ll leave it at that, While I think we are close to having a very invest-able stock for years to come given the low expectations, strong balance sheet and massive commitment to cash return, I am trying to get it just right, where my friend Josh suggests that may be making this whole game a bit harder than it has to be.

Oh and yes there are other stocks in the market, and this will end what has been a week long Odyssey that covered all things Apple, we are bored too, good-bye.



MorningWord 4/24/13:  In case you missed it, last night after the close, AAPL reported their fiscal Q2 and guided for the current qtr.  Here is a quick summary of results compiled by Business Insider:

  • Revenue: $43.6 billion billion versus $42.3 billion analysts’ estimate
  • EPS: $10.09 versus $9.98 analysts’ estimate
  • Gross margin: 37.5% versus 38.5% analysts’ estimate
  • iPhone: 37.4 million versus 36.5 million analysts’ estimate
  • iPad: 19.5 million versus 18.3 million analysts’ estimate
  • Mac: Just under 4 million million versus 4.1 million analysts’ estimate
  • iPod: 5.6 million versus 6.25 million analysts’ estimate
  • June quarter revenue: $33.5-$35.5 billion versus $38.6 billion analysts’ estimate
  • June quarter gross margin: 36%-37% versus 38.6% analysts’ estimate

Unfortunately for the Bulls, there weren’t too many questions answered and many of the big ones (declining margins, market-share & product innovation) lack any real near term visibility.  I think it is safe to say that most analysts and investors expected in their base case scenario that the company would miss expectations for Q2 based on commentary from component suppliers and rumored activity from contract manufacturers in Asia, so the beat is a mild positive.  The fact that the company beat on sales, modestly on earnings and on the all important iPhone & iPad units (albeit dramatically lowered expectations since than Jan guide down), but came in at the low end of the company’s gross margin range should continue to stoke fears of product commoditization (think DELL & NOK).  The June guidance just rams the fact home, turning this growing trend of cannibilization, leading to commoditization, may be an insurmountable task for in the near future as lower cost competitors like Samsung are perceived to have more, better & cheaper products, and they will continue to use price as the primary tool to undermine AAPL’s once high end mobile/tablet dominance.

Also unfortunate for the bulls, the most anticipated news, the one announcement that was thought to be able to buoy the shares as the company headed into a perceived 2 quarter product refresh blackout, fell flat and largely below some optimistic expectations.  The company announced that they are raising their quarterly dividend by 15% ($2.65 to $3.05) and double their share repurchase program through the end of 2015 (equaling $60 billion).  While this is obviously a positive from a sentiment standpoint, given the company’s $145 billion cash hoard ($100billion off shore), management finally thinks the stock is cheap enough to buy it back, but many investors who expected some fancy financial engineering in the form of a special dividend or preferred shares will likely be sorely disappointed.

As the conference call started (read transcript from Morningstar here), the stock was up nearly 6% in the after-market, but as CEO Tim Cook and CFO Peter Oppenheimer conducted the hour long call, the stock seemed to drift lower with every word, and settled a couple bucks below where the stock had closed the day.  After listening to the call last night, specifically to the tone, and now this morning re-reading the transcript, I can’t help but think that AAPL’s stock may continue to underperform the broad market and its peers for the near future, despite already being down 24% ytd.   The tone of the Q&A (read here) was decidedly negative, this coming from many bulge bracket analysts who currently rate the shares a Buy.  There was specific focus given to what appears to be rapidly declining gross margins, growth in China that is decelerating, and lack of new product introductions.

We spent a lot of time thinking about (here), speaking about (webinar here) previewing (here) and Enis trading it (here) AAPL’s Q2 report in the last week or so.  My conclusion was simple – sentiment had gotten really bad on a stock that just 7 months ago was the most valuable company on the planet, only to see its shares nearly cut in half.  But just as the stock overshot on the upside, it is likely to do so on the downside without any material catalysts.  There are many reasons why the stock looks cheap at $400, some of the same reasons that bulls argued at $700, but given the dramatic share decline and near investor disgust the stock is getting interesting.  BUT, NOT YET.  My take has been we need to see capitulation, all out hate selling, when retail investors and fancy institutional ones alike, finally throw in the towel and say get me out!  I suspect the stock to continue to drift lower, as it has over the last few months and at some point, for possibly some unexplained reason the price action will start to crescendo.  Last week I laid out a Name That Trade for one way I am considering playing for a second half bounce on a selling capitulation (here), and given last night’s news and what I expect the stock’s reaction to be over the coming days/weeks, I am lowering my “BUY of the Century” call to somewhere below $350 (would mark a 50% re-tracement off of the Sept highs.

Simply put, the company needs to continue to innovate, if they do not break into new categories or materially improve existing ones, if this stock has a chance of sniffing $500 ever again.  Tim Cook, the guy that Steve Jobs himself said was not a “Product Guy” needs to execute.  Refreshing all major product lines in a 5 month period in 2012 was likely the blunder that set the stage for what is turning out to be a disastrous 2013, thats on cook.  And just as investors rued the day that Steve Jobs would no longer be the visionary of AAPL, the day that Jony Ive leaves the company to once again make “truly great products” put a fork in this baby, cause it is gonna feel like a nuclear winter in between their next “great product”.

So not to be too downbeat, but yesterday’s result, guidance and cap intro plan do little to get new money excited in mind, and my sense that we will see lower lows that ends in some sort of capitulation is still my call, now just a bit lower, we have more visibility that nothing is going to happen on the product front until the fall.  The stock remains cheap, just as it was yesterday and you will see many come up with eye-popping low single digits multiples for the stock ex-cash, thats not the reason to step in yet.  The value view, as the only identifiable catalyst needs to be married with sentiment by way of price action, and I believe that is coming to a theater near you in time for the summer blockbuster season.  At some point in the near future the stock will be be discounting the apocalypse and then it will just start going up, nailing the exact bottom will be impossible, but catching it as others are panicking will possibly be the “Buy of the Year”!