In 2012, I had a very bad trade in Apple (AAPL). On a few occasions I tried to short the stock for a whole host of reasons that ultimately could be explained as an unusual sentiment bubble. There were plenty of fundamental reasons to be bearish, many of which that came to fruition during the stock’s 45% peak to trough decline from September 2012 to June 2013. But when you’re early on a trade, that’s all in hindsight. There have been only a few instances in my almost two decade long career where I have seen such universal bullishness about a stock, the underlying company, its products, its management and their opportunity. On two of those occasions it has been in AAPL. And to the tunes of hundreds of billions of dollars in market cap, and both scenarios have been quite similar, which is why the stock’s recent decline of more than 20% since its late July earnings, (at one point yesterday it was 30%) is worth thinking long and hard about.
First things first, the stock’s $16 decline on yesterday’s opening was staggering when you consider that AAPL is the largest market cap company in the world and has a third of its $600 billion market cap in cash on its balance sheet. The 15% move represented close to $100 billion in market cap from the previous sessions highs. That sort of price action was pure panic:
So why would there be panic in a stock that is so highly regarded by Wall Street analysts, investors, financial pundits, and techies? The question answers itself. Who is the incremental buyer of a stock that has been widely regarded as a “no-brainer” of an own. Everyone already owns it.
In hindsight, the stock’s inability to breakout to new highs after a great fiscal Q3, and in front of a seasonally strong Fall with new iPhone, should have been the tell that the stock was in for a rocky ride. The one year chart shows the failure at the previous highs, a big gap on fundamental news that ultimately broke the long standing uptrend:
Might the extreme move in yesterday’s session mark a near term bottom in shares of AAPL? It could, but I doubt it’s easy money in the stock from here when you consider the back drop of global economy/markets. And Tim Cook emailing Jim Cramer during yesterday’s selloff? That seems more bizarre than reassuring:
— Carl Quintanilla (@carlquintanilla) August 24, 2015
The macro situation behind the sudden stock market volatility probably doesn’t go away overnight. Central bankers have lost control in an increasingly challenged global economy.
As for Apple, Tim Cook is echoing what he has said on the last few conference calls, and the emerging middle class trends he refers to will continue for years. But in the near term, remember that we are at a critical moment in China. I am hard-pressed to think all of the fiscal and monetary policy that the PBOC is throwing at their economy is so their citizens can spend 13.8% of their annual household income on a freaking iPhone (vs 1.6% in the U.S.), from BGR.com:
In a post titled MorningWord 7/22/15: $AAPL – You’re Not a Beautiful and Unique Snowflake that followed AAPL’s recent results, I highlighted my number one problem with the stock in the near term:
So the notion that “you don’t trade AAPL, you own it” has been proven false the last few months, especially yesterday. Back in early April I highlighted ways that investors could trade their AAPL in a post ALSO titled, MorningWord 4/2/15: $AAPL – You Are Not Special. You’re Not a Beautiful and Unique Snowflake:
This post is not a suggestion to short the stock. But the idea of putting it into some special category is silly. If you have owned it for a long time then you have sizable profits. If the size of the position is becoming disproportionate to other holdings in your portfolio, and the risks are mounting, then you have options (pun intended). You could sell calls, or strangles against your stock and add yield, that would definitely fall into the category of trading your AAPL. You could collar your AAPL stock by selling a call and buying a put, limiting your potential upside, but defining your potential risk to the downside. That would also be trading your AAPL. You could do the unthinkable and sell your AAPL and lock in profits and replace that long exposure with long calls, call spreads, or short put spreads, defining your future risk.
We write about AAPL a lot, and in hindsight, it’s been important to pick apart the bull thesis lately:
I fundamentally reject the notion that any one stock is special and should trade by a special set of rules. AAPL set up for the decline we just saw, and it provided an all too brief buying opportunity. From here, who knows what’s next?
But as the Boss once said, “blind faith in your leaders, or in anything will get you killed!”