MorningWord 1/6/16: $AAPL – As the Worm Turns

by Dan January 6, 2016 9:50 am • Commentary

Apple (AAPL) shares are down about 17% since Nov 10th. That was the day the stock had its largest one day gap lower since late August on a brokerage report from Credit Suisse suggesting that the company was cutting iPhone 6s orders. Since then the relative under-performance to the S&P 500 and the Nasdaq Composite has been pronounced with both indices down only 5% in the same period:

AAPL 6 month chart from Bloomberg
AAPL 6 month chart from Bloomberg

And then in mid December, a few other Wall Street analysts echoed similar sentiment from supply chain checks, cut estimates but left ratings unchanged (here).  I think it is safe to say that the expectations surrounding iPhone unit sales in the quarter just ended, and those expected for the current quarter are as uncertain as they have been at any point since 2012.

Taking a longer term view of AAPL’s chart (since its 2009 financial crisis lows) the stock is sitting on important long term support at $100 (the 2012 high prior to its 45% decline) with no obvious support below until the long term uptrend in the mid $80s:

AAPL since 2007 from Bloomberg

After repeated attempts in the Spring and Summer to make new all time highs, the stock has declined 25% since.

And there seems to be a massive disconnect between Wall Street analysts’ overwhelmingly positive sentiment (43 Buys ratings, 7 Holds and only 1 Sell), continuing retail investor infatuation, and that of the stock’s largest shareholders. To see that look at the latest filings, 13 (11 meaningfully) of the 20 largest holders reduced their stake in AAPL, while only 5 raised it (only 2 meaningfully):

from Bloomberg
from Bloomberg

Just because AAPL is a great company that makes great products does not mean that it will always be a great stock.  Regular readers know that while I am a huge fan of the company & its products that has not prevented me from poking holes in what is often a widely complacent bull case. Throughout the past year I have taken specific issue with the notion permeating the financial press that “you own AAPL, you don’t trade it”.  As a professional trader since the late 1990s I reject that sentiment. I wrote about this a couple of times in 2015:

MorningWord 7/22/15: $AAPL – You’re Not a Beautiful and Unique Snowflake

MorningWord 4/2/15: $AAPL – You Are Not Special. You’re Not a Beautiful and Unique Snowflake

There are no special rules for individual stocks. And worse, when everyone is in universal agreement about a company’s prospects, which they have been in Apple for years, it makes sense (as it did in late 2012) to consider why the stock might not do what everyone expects.

As for those who say none of it matters because in 5 or 10 years AAPL will be worth a lot more than it is now? It would be hard for me to to argue with that statement. But in the meantime, there are ways to trade around your AAPL holding without actually abandoning your long term bullish thesis. For instance, you can reduce risk when things look uncertain and you can add yield when the stock goes sideways.

I want to reprint the final point from my post in early April. This was when the stock was approaching an all time high:

But I see no reason to put the largest market cap stock in the world, which also happens to be the one of the most widely traded stocks and options every day, in a special category where you just own it. It has been a tremendous trading vehicle on both the long and the short side for years now.

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.  You get the point.

While large holders like Carl Icahn have the luxury of taking a very long term time horizon, you and I have to manage risk. After all, we care about mundane things like planning for our kids’ education.  Don’t allow yourself to ever be brainwashed into thinking that any stock is  a “no-brainer” or that “you own it, you don’t trade it”. That level of complacency puts you at risk. And you usually hear that sort of complacency at the very moment you should be taking profits and reducing your risk. Just as stocks are meant to be bought, they are also meant to be sold. Heck, Fidelity, the 4th largest holder, sold nearly 8% of its stake in the 3rd quarter.

Lastly, unlike quarters past, expectations are NOT HIGH, heading into the company’s fiscal Q1 earnings scheduled for January 26th.  The lower the stock goes, the greater the turn in sentiment, possibly some downgrades, and the possibility for a relief bounce post results, but from where?