Apple earnings stock UP. Now Apple DOWN. Wonder why?
So another great day for apple shorts and bad one for apple longs. Stock is down almost 20 points (3.14%) today on no news. Well actually some good news out of the NYT about how good Apple is at managing their tax burden. Normally this would be a good thing since their methods are all legal.
So why the drop then? Remember Mr. Market is NOT efficient. If he was Buffett and Shelby Davis would not have made the returns they did. Today Mr. Market is making you an offer to sell you a business at a significant discount with a big margin of safety built in.
Ok so the drop today you ask….don’t read too much into it. It is simple. Day traders, algorithmic traders, technical traders and high frequency traders all working the stock down. There are lots of option games being played as well. How should we as investors view this price action? If you have funds you may consider taking Mr. Market up on his offer today. It may not last very long.
Over short periods of time the market is a voting machine and over long periods it is a weighing machine. Just 90 days ago analysts had apple making just 41/share for 2012 and now they are about 47/share. That is just 90 days. Make no mistake apple is growing faster then 95% of Fortune 500 companies and trades at a valuation lower then 95% of them.
Apple is also partly to blame for this price action as they have done nothing to defend the stock. A 20 for 1 split would get media obsession off the stock price for starters. Next a substantial buyback authorization of 50 billion or more would support the stock. The 10 billion buyback over 3 years does nothing but offset option diluation. This is no help to shareholders nor does it support the stock in any way. Apple is indeed mismanaging their cash and stock and this is helping the shorts and other “traders” play with the ticker at will. There is no fear of a big dividend or buyback to halt their objective.
Also short term fast money traders prefer downward moves because they can get investors that have weak hands to give up their shares in panic more easily. Remember this human trait “the fear of loss is greater then the desire for gain”. Therefore the path of least resistance will always be down. Human nature.
Ultimately you have a stock gift today from Mr. Market. At almost 580 you can do some simple math and be objective about the facts. First apple has 110/share in cash which is 110 billion in the bank with no debt. They have iphone 5 coming. iOS 6 is coming. iTV is coming. These are catalysts for 2012 and 2013 that will drive earnings to $100/share in 2014. Additionally they expand the apple ecosystem as a whole and strengthen the Apple Moat. Nothing wrong here.
So take a 2014 look and you have between $150 to $200 billion in cash which is $150-$200 in cash per share. Back out the low end of that 150 from today’s 580 and you get 430/share ex-cash. Now 2014 you have $100 in earnings so Apple would have to trade for just 4.3 times earnings ex-cash assuming no stock movement from today’s price. Here you can see two things. First the enormous margin of safety you have. Second you can see what happens over time periods that are greater then a day, week, month or year.
So decide today if you want to take Mr. Market’s generous offer or see what he wants to offer tomorrow or next week. You never know how generous or greedy he may be day to day or week to week. However it is better to buy a great company at a fair price then a fair company at a great price. With Apple I think you get a great company at a great price, a rare opportunity.