I am, in many ways, incredibly lucky. Apart from the important stuff like having been happily married for over twenty years and having three wonderful children I also get to study markets and prattle on about them all day. This is usually, as you would imagine, not too much of a trial for somebody who finds that kind of thing fascinating. Nasdaq.com gives me a lot of freedom to write about what intrigues me at any given time and I don’t have to follow any pre-set formula. I am, therefore, not looking for sympathy, but I have a dilemma. Two of the Golden Rules of internet punditry are currently in conflict.
Rule number one is to have a definite opinion. In real life, most of us make decisions without 100% certainty, but it isn’t very interesting to read somebody making qualified statements; “The collapse in emerging markets presages a total meltdown!!!’ is far more sexy than “There are some problems in some areas, but the market is probably overreacting and we will all have forgotten about this in six months,” even if the second statement is closer to the truth as most people see it.
Rule number two is to mention Apple (AAPL) as many times as possible. In these days where search is king and clicks count, frequent mentions of a huge company on which everybody has an opinion is generally a good idea.
Right now I am happy to write about AAPL as the stock is in a fascinating position. What I lack is a definite, actionable idea. Actually, that’s not true. I have an idea; I believe the stock is a buy. The question is, should we be buying now?
This most recent collapse in AAPL that sees the stock hovering around $500 is a little puzzling to me. It’s not that the catalyst is unknown. Apple reported slightly disappointing sales of the iPhone 5S this week and, more worryingly, issued a forecast for the year that warned investors of the possibility of the first YoY revenue decline in eleven years. What is surprising to me, and many others, is the ferocity of the reaction.
Revenues and even margins are coming under some pressure, but is that honestly that much of a surprise? I first started suggesting that would happen in August of 2012; it’s hardly news. What we are left with is a company that is sitting on a massive pile of cash, still dominates in its field and is trading at a P/E below 13.
The problem, I believe, is not so much with Apple itself but rather with the market’s perception of Apple. For years now AAPL has been seen as the ultimate growth stock. Even as analysts kept increasing forecasts for growth, so Apple kept beating them. Phenomenal results were piled on phenomenal results, but we all knew that couldn’t continue forever. As growth has slowed somewhat, Apple has set about the mundane business of making money, and returning some of that profit to shareholders.
Put another way, AAPL has moved from the growth stock that everybody must have into the area as a dividend payer. Each step closer to that status has seen more growth fund managers unload, but the value and dividend guys have yet to pick up the slack. I have no doubt they will, but when and at what level is what we all want to know. Here, dear reader, is the problem... I don’t know. It would be easy to pretend I do or to come up with some fancy formula to predict it, but to me, above all of the rules of internet punditry is one more; be honest.
Honesty doesn’t allow me to answer my own question, but I do have a solution of sorts, based on a time honored tactic of long term investors. Dollar cost averaging is a simple idea. Nobody wants to invest all of their money then watch a market or stock tank immediately, nor do they want to miss out if the thing is going to roar. By spreading any investment over a period of time, both of these things can be avoided. It is generally used for “buy and hold” investments in mutual funds, but in this case could be the best approach to AAPL.
Normally, as somebody with a trading background, I have a natural aversion to averaging, especially on the way down. It is usually the desperate tactic of somebody who refuses to accept that they could be wrong and is the biggest cause of massive, job threatening losses in a dealing room. In this case, however, when it is part of a plan, I’ll make an exception.
If you agree with me that AAPL is, through no fault of their own, a stock in transition, then it is hard not to see the value in it, but it is also hard to know when traders will stop punishing it. The point, though, is that they are punishing the stock for an imaginary sin. Exponential growth is no longer priced in, nor are analysts still assuming it. At some point, AAPL will be revealed as the screaming value it is becoming, and at that point the turnaround will be as dramatic as this week’s fall. Spreading any investment over the next few months as that scenario plays out makes perfect sense.