Tuesday, March 5, 2013

What to do with Apple?

I will be traveling for the next three days.  My next post will be Monday, March 11.

Everyone, it seems, has an opinion on Apple stock.

From hedge fund operator David Einhorn to Warren Buffett, the media has been full of advice to Apple CEO Tim Cook on what the company should do to stem the relentless downward pressure on the stock.

Most of the opinions involve deploying at least some of the $137 billion cash hoard that Apple has accumulated back to shareholders.

Einhorn pointed out that the size of Apple's cash position is larger than all but 17 companies in the S&P 500.  After filing a lawsuit a few weeks ago, he proposed that Apple issue preferred stock (he suggested the name "iPreferred") to at least give a decent cash return to investors (Apple rejected this suggestion).

It was announced yesterday that Einhorn's suit has been dropped.

Warren Buffett was on CNBC yesterday, and he too was asked his opinion on Apple.  Here, from the CNBC website, was his comments:

On the pressure to increase the dividend:
"I don't own any Apple and I haven't, though I did talk with Steve Jobs a few years ago about what they might do with the cash. The best thing you can do with a business is run it well, and the shares will respond."
On David Einhorn's push to get Apple to issue preferred shares:
"I would ignore him. I would run the business in such a manner as to create the most value over the next five to 10 years. You can't run a business to push the stock price up on a daily basis. Berkshire has gone down 50% four times in its history. When that happens, if you've got money you buy it. You just keep working on building the value.
"I heard from people each time [Berkshire shares went down], saying why don't you do this or that. Pay a dividend. I think Apple's done a good job of building value. They may have too much cash. Now one reason they have so much cash is two thirds of it has not yet been taxed.
"When Steve called me, I said, Is your stock cheap? He said, yes. I said, Do you have more cash than you need? He said, a little. [laughs] I said, then buy back your stock. He didn't. Now, when our stock went from $90,000 to $40,000 to $45,000, I wrote about, we wanted to buy the stock. We didn't quite manage to.
"But if you could buy dollar bills for 80 cents, it's a very good thing to do."

Tucked in the Buffett comments was something that many commentators are overlooking; namely, that 2/3 of Apple's cash is actually still overseas. If they were to repatriate it back to U.S. for either dividends or share repurchases, they would owe a massive tax bill.

For portfolio managers, figuring out what to do with Apple is not easy.

First, despite its recent fall, at a market capitalization of $373 billion, the stock is 2.9% of the S&P 500. Only Exxon Mobil (worth $383 billion) has a higher market cap. Apple's market value is +62% higher than General Electric, and almost twice as much as Google.

Active managers who either did not own Apple in the first three quarters of 2012, or were underweight, significantly lagged the S&P when Apple jumped by nearly +73% in 9 months.  Yes, the cynics will say Apple was a "sell" when it hit $700, but no one thought so at the time.

The memory of this haunts many managers, who fear that Apple could surprise the market with a special dividend, or a major buyback program.

Sporting a 2.5% dividend yield, and trading a price/earnings multiple of less than 10x, Apple should offer considerable appeal to value-oriented managers.    This is particularly true when you look at Apple's multiple relative to its growth rate, which has been more than +45% over the past 5 years, which makes it probably one of the cheapest growth stocks in the market.

But for now Apple looks to be a damaged stock, destined to continue to drift lower, despite its attractive valuation.

Here's chief technical strategist Mary Ann Bartels of Merrill Lynch in a piece published this morning:

Point & Figure chart & on-balance-volume bearish on AAPL 
There are no major signs of a bottom for Apple Inc. (AAPL) as the stock reaches a new 52-week low. The point & figure chart (P&F) remains bearish with downside counts at $411 (near the $415 bearish triangle target) and $376. In addition, the P&F chart has a confirmed break below major uptrend support, which is a negative sign. A big downside price gap at $465-$505 is providing a barrier on rallies in AAPL. The $482-488 area is P&F resistance within this price gap. 
On-balance-volume on AAPL suggests selling not bottoming 
On-balance-volume, a measure of accumulation and distribution, continues to lead price action lower and suggests lower volume on rallies and higher volume on sell-offs, which is bearish and points to distribution. This is not a sign of a bottom but a sign that sellers are not completely exhausted yet - side bar.