My letter to Tim Cook. CEO of Apple

December 7, 2012 Leave a comment

Mr. Tim Cook,

Hi.  First let me briefly state I am a long time Apple user since the Mac Plus era.  I own iPhones, iPads, iPods and iMac’s.  Everyone in my family owns them.  I also am a long time shareholder of Apple stock with a substantial stake.

It disturbs me as a huge fan of Apple and a shareholder to see the media and the market take down both the stock and the company along with it.  I believe there are specific reasons for this and things Apple can AND should take action against to defend both.  When a stock gets broken (and Apple, the stock, is broken now) psychology changes.  People look for reasons why the stock is in free fall and they find reasons whether real or not.  People must define why things happen even when they are random or unrelated to the underlying company. I believe this is the case.  One has to be careful that the stock does not begin to tarnish the brand as people seek out negatives.

So one question as an investor/shareholder I ask as I am sure others do is “If Apple does not believe in their stock at these absurd low valuation levels why should I?”  The 10B buyback merely offsets option dilution.  At this valuation Apple could bring confidence with a 50B buyback over say 3 years.  Even if you had to borrow at low rates and deduct the interest on the loan to do this it would be confidence inspiring and immediately accretive to earnings.  You would still have 80B in cash and it would grow 50B plus annually for at least two years.  In the meantime after investment gains Apple’s cash erodes about 3% annually to inflation which is almost $4 billion per year.

Additionally a dividend could be paid ahead of the fiscal cliff with no net change to Apple’s balance sheet at the end of 2013.  The sensitivity to the coming tax changes would signal Apple’s management cares about shareholders.  Right now I’m not sure that belief is held anymore.  You could also issue a special dividend or increase the annual dividend as a show of the boards confidence in the future.  Options are plentiful.  No action is not the best option here.

Remember a stock is nothing more than a piece of paper if dollars do not come back to shareholders.  It is similar to gold.  Gold pays nothing. Apple right now pays 2% but it would take 50 years at that rate to get your investment back.  Not significant enough to support the stock or attract shareholders.  A stock without a significant dividend becomes just something that you hope somebody will pay you more for down the road.

It pains me as an Apple fan and shareholder to watch a great company and stock both suffer at the hand of the media and market while Apple sits by and does nothing to defend either.  Apple has blown away earnings on top and bottom line before only to see shares fall on that press release.  At some point psychology can get so bad that people will always hold the stock down at absurd low multiples just waiting for failure whether it takes a few years or a decade.  Sentiment now thinks Apple is becoming the next Sony.  Even if you crush earnings the next few quarters this sentiment may not change.  People will always think Apple is just a few quarters away from its eventual decline.  A non virtuous circle

The weapons Apple has to show confidence are many. 
Significant buyback of shares would be the biggest vote and most effective tax wise.  Second is a dividend increase and special dividend with possible pull forward ahead of the cliff.  Last is a stock split.  While I know you think this makes no difference I disagree.  There is a psychology and obsession with high share prices.  High prices mesmerize people.  I was a psychology major and see it firsthand on tv and in person.  Real world prices matter and even though it’s just slicing the pie up people cannot make the disconnect.  Even the MBA’s and professionals know technically there is no difference they too fall prey to this.  It is human behavior.   A 10 or 15 for 1 split would alleviate this and show the company is confident in the future.  I argue if it makes no difference then just do it.  At worst you get an advantage you did not think existed.  It will get everyone off the high share price obsession which is very real.  99% of investors don’t know how a $500 or $700 stock can be “cheap” yet Apple is.

I close with thanking you for time and consideration.  Also would like to say I think you and the entire team are doing a fantastic job.  I follow Apple closely on a daily basis as it is my largest investment and in my view nothing is broken with Apple products.  However with the financial management and stock management there are some things you may wish to consider and plead that you do.

Bond Guru Jeffrey Gundlach Apple Price Target $425? Gundlach is Apple Guru now?

November 7, 2012 4 comments

Apple Nearing End of Correction?

I’m getting the feeling lately that Apple (NASDAQ: AAPL) is now approaching the bottom of its recent correction.  Apple has gone through similar size corrections in the past only to prove time and time again a buying opportunity.  It seems you can’t go more than an hour now on CNBC without hearing some sort of Apple bashing.  Everyone is an expert on Apple these days including bond guru “Jeffrey Gundlach”.  Today on CNBC he slapped a $425 price target on Apple.  Can anyone now be an expert on Apple stock?

Who Do You Get Your Investing Advice From?

Now I’m not sure about you but I usually don’t take my tech stock investing tips from bond guru’s.  I’ve been in the tech industry for over 15 years now and follow the sector closely so maybe I feel better equipped to gauge Apple’s prospects than a bond guru.  Gundlach argues that because Apple shares have gone up rapidly that they must retrace back to their starting point of $425.  Interesting logic right?  I must add that Gundlach is talking his own book. He has disclosed he is short Apple shares.  I’d expect nothing less from a bond guru opining about tech stocks.

No Shortage of Bear Arguments

The endless string of arguments predicting the imminent demise of Apple is clearly laid out by the Apple bears.  Management shakeup is one.  I believe losing Scott Forstall may turn out to be a blessing and I certainly do not worry about the loss of him at Apple.  There are many smart people at Apple and many more hot shots Apple could easily attract to work for it. Forstall was rumored to not play well with others and take credit for the work of other employees.  It made me wonder how much was truly his idea or work and it might make you wonder too.  If Apple lost Tim Cook I would be more concerned and if it lost Jony Ive I’d put the risk for the company at a very high level going forward.  However they retain what I believe to be an “A” team capable of running the company and continuing to evolve and innovate.

Innovation or Evolution? 

Gundlach further argues  that Apple just shrunk their iPad and therefore that was not innovation.  I didn’t realize that every product Apple ever made in the past was revolutionary and not evolutionary (detect my sarcasm).   Apple came out with a hard drive based iPod under Steve Jobs.  Next it was the flash based iPod.  Then there was the iPod nano, Shuffle and iPod Touch.  Were any of these product groups really any more innovative than the original iPad’s evolution to its current full size generation and mini?  The nano was a shrunken version of the touch and the shuffle was the micro-sizing of it.  How about the iPhone?  Under Steve Jobs they had iPhone version 1. Next was the iPhone 3G and then the 3GS!  Did every bear come out and say the 3G and 3GS were just the same iPhone’s in a slightly different form?  Next was iPhone 4 then 4S!  The 4S didn’t even change form factor and it sold like crazy!  These iPods and iPhones were not any more innovative than the iPad iterations and remember these were all under Steve Jobs tenure!

Can Apple Grow by Simply Evolving

Here is the deal.  Apple does not need to innovate brand new never heard of gadgets to prosper.  It does need to innovate if it wants to annihilate the competition versus just growing.  If they can’t create entirely new products well than they will just compete and do it well.  No other company has a “Steve Jobs” so it’s not as if they need to compete against a genius running it.  Few companies in the world posses Apple’s brand loyalty and awareness.  I have yet to see people line up outside any store for an Android phone or tablet, have you?  I think you get the picture.  Apple can just improve what they have. Tweaking the current product lines in larger and smaller form factors. Make them smaller, lighter, sleeker and add incremental improvements.  Small innovations on the existing lines are fine. Nothing revolutionary needed for them to simply grow at a market beating pace for years to come.

Market Beater to Market Crusher

Should Apple have a rabbit in their hat like iTV well then they just add to their already market beating growth rate.  What bond guru Gundlach fails to point out and maybe does not understand is that no other company is doing anything better or different than Apple is.  Apple is not competing against any company that isn’t also doing just what he is suggesting Apple is doing.  Samsung is making smaller and cheaper tablets. Big deal. Amazon is giving away tablets that are not as good as iPad.  What company is outflanking Apple where they have to execute any different from what Steve Jobs did when he evolved the iPod, iPhone and iPad into evolutionary versions and not revolutionary?  Not one company as far as I have seen.

That is a lot of Cash

Apple sits on the largest cash war chest of any company in the world.  Think about that for a second.  If Gundlach the bond guru’s target is achieved that would mean Apple would be trading for $300 if you back out the net cash on the balance sheet.  With $50 plus in earnings this year that is a PE of 6.  Right now Microsoft (NASDAQ: MSFT) trades for about 16 times earnings.  Adobe trades for 21 times earnings.  The Apple sell off has become chart driven and fear driven.  Perhaps  there are also traders taking gains before a potential cap gains tax rate increase next year.  Whatever the reason I am confident the bond guru’s target is not going to happen.

You Have to Execute

As someone who does follow Apple and technology closely I would place the only risk for Apple in the near and medium term on execution.  You now see supply constraints for iMac, iPad Mini, iPhone 5.  Apple needs to get these products into the hands of consumers who want them.  If they can’t produce them they cannot sell them.  It seems production problems are a major issue right now.  Foxconn’s CEO stated today that they can’t produce the iPhone 5 to meet demand.  I fear Tim Cook has spread himself too thin taking on his former COO supply chain and operations role along with Steve Jobs CEO role.  That is a lot for one man to handle.  The Q4 risk will be on the supply and not demand side.  How well Cook solves this will make or break this quarter.  If they don’t blow the number out we’ll see a lot of push through into Q1 next year.  However there will be opportunity costs in lost sales as they miss the holiday gift season and corporate end of year buying.

Stock Prices in AppleGeddon

Even if they only make their number or beat/miss by a bit I believe much worse is now priced into the stock.  Trading at about 7 times next years free cash flow on an ex-cash basis the stock is priced for some serious declines in revenue and earnings for the foreseeable future.  I think Apple’s loyal and growing fanbase will prevent this from happening as long as Apple can ship product.  Other catalysts still include China Mobile and the 700 million subscribers.  Nobody talks about that anymore.   It will happen at some point.  Emerging markets are also going to come online such as India.

Apple Store Jam Packed

An anecdotal note for you as well.  I was visiting my local Apple store in New Jersey this past Sunday.  It was packed with a line out the door waiting to purchase iPad’s and iPhones.  Keep in mind this was several days after the iPad mini launched.  I’d estimate at least 70 plus people (not including Apple employees) in the store and in contrast the much larger Microsoft store had 12 people in it.  It was the most packed I have seen Apple’s store since last year about a week before Christmas.  It seems Main Street never got Wall Street (or bond guru Gundlach’s) memo that Apple is over and left for dead.  People were buying the mini, iPad’s, iPhone’s and everything else in the store.  Lots of energy and excitement there.  Not much at Microsoft store though which again has a stock trading for a much higher PE now than Apple.

Be Greedy. The Glass IS Half Full

There are many great things happening at Apple right now and over the next few years.  It seems right now the pundits only want to see the glass half empty.  This happens a lot as “Mr. Market” often mis-prices stocks both on the upside and downside.  I think with Apple’s shares on sale for 20% off it will prove beneficial to “be greedy when others are fearful” as Warren Buffett often advises.

The reason Apple priced the Mini iPad at $329

October 23, 2012 Leave a comment

For those who wonder why the $329 price tag instead of sub $300 the answer is pretty obvious.  /Any new apple device will have demand exceeding supply.  They simply can’t make enough in Q4 to satisfy demand at $329.  With this fact why would Apple price it any lower?  The market will bear that price for as many as they can make through the end of the year.  

Once supply catches up and any slack starts to set in maybe mid to late 2013 we will see a drop to $289 or $299.  Also in 6 months it will cost Apple 10% to 20% less to build the device and they can maintain margin with this timing.

So it would be beyond stupid to price it so low when demand already strips production.  I would agree that it should have been $299 if they could build an unlimited number of units but that is simply not the case.  

Apple has already shown how it can decrease the price on aging products (ipad 2) and roll out the latest flagship at full price.  We’ll see the same thing here.  I would say Apple would have been insane to price it any lower when buyers are lined up at $329 to snag every single one they can build

Categories: Finance and Stocks

Chipotle misses EPS and Revenues by a hair. Will the ever advertise?

October 18, 2012 Leave a comment

Earnings are out for Chipotle Mexican Grill ( CMG ).  The numbers just missed estimates by a hair.  The street wanted 2.30 in EPS and they earned $2.27.  Revenues were generally in line.  Same Store sales were just ok at 4.8%.  However guidance for same store sales for 2013 were forecast for flat to mid single digits.  That is NOT good.

So what can they do to remedy this flat same store sales growth?  Well it is easy.  Chipotle needs to start marketing and start now. I see five Taco Belle television commercials each day. I have never seen one Chipotle commercial. They need to start TV, radio marketing, branding and promotion in select areas.

I’m not sure why Chipotle thinks that they can live strictly off of word of mouth for traffic. They have gotten by so far to date on this but at some point you do need to market and advertise. Coke and Apple are top brands on the planet. They spend a ton marketing. Apple has plenty of free press and word of mouth and still runs TV ads galore.

If Chipotle thinks they can just let people find them and not advertise other than billboards that just isn’t going to cut it anymore. They need to hire a new marketing officer who gets it. Facebook marketing alone isn’t going to cut it.  If I don’t see some kind of attempt to start advertising and marketing I am afraid I’m out of the stock.  Flat same store sales could turn into declining same store sales.

It is no wonder that local restaurants and pizza places near me even advertise. Everyone has to.  Why does Chipotle think they are above all that? McDonalds advertises. Wendy’s does. Domino’s does. Pizza Hut does. Taco Belle does. Arby’s does.  Chipotle why are you so special?

Categories: Finance and Stocks

Apple and Confirmation Bias

October 12, 2012 1 comment

Confirmation Bias.  What is it?  This is the human tendency to favor information that confirms their beliefs or hypotheses, not only by hearing what they want to hear but also by seeking out those with similar opinions.   Ths is the smart investors enemy.

I see confirmation bias in Apple today.  It has now dropped 10% plus off its recent high in spite of the growing mountain of positive news regarding the iPhone 5 launch and the coming iPad mini.  Things continue to fire on all cylinders for the kids in Cupertino.  However Wall Street seems to focus only on the few negative marks against this company that is held to the standard of perfection.

Wall Street focuses on Apple Maps and the purple haze in photos taken on the iPhone.  Meanwhile “Main Street” is buying up more than Apple can make.   iPhone owners are not in tune with the shorts and bear arguments nor do they care.  They want the phone and those who purchased it by in large love it.  There are the few out there that may express displeasure with it but you can focus on the 98% who love it or the 2% who are not thrilled.  Wall Street (for now) is focusing on the latter.

 
The stock price has shown recent weakness and bears fall into confirmation bias traps here thinking that these few negative things are the story and future of Apple.  This could not be further from the truth and these shorts are going to soon have to cover or have their heads handed to them.  Stock price direction does NOT confirm the fortunes of a company.  Witness a few years ago Apple’s drop from 220 down to 80.  I’d say the recovery to 704 shows that you cannot take a stock price movement over the short term to conclude your ill conceived thesis is correct.

So for now the sentiment is negative on Apple in the media.  Earnings are coming and the huge fourth quarter and at some point this all will flip on a dime.  What was once hated and loathed will once again become loved.  What was once not “working” will once again “work” and everyone will pay up and up as the price goes higher.  Traders will desire the stock more as it goes up.  It’s a fools game.

Apple is a company that is not going anywhere anytime soon.  Unlike RIMM or Nokia, Apple has one of the top brands in the world.  Typically ranking number one or number two.  These companies never had such brand equity.  They also did not have the variety of products or the ecosystem that Apple enjoys.  Apple has been making computers for decades.  They are still around today and stronger than ever in terms of Mac unit volume and market share.  They own the music MP3 space.  They are one of the dominant players in smartphones having literally invented the category.  Apple also disrupted the world with tablet computing which is now showing its legs as it crushes the PC industry.

Yes Apple is not a one trick pony like RIMM or Nokia.   Apple is well positioned in many industries.  Apple has the largest cash war chest to defend its position and innovate.  What they can’t innovate they could buy.

Steve Jobs is gone but his crowning achievement is the company he built, its culture and team he left in place.  If you accept Jobs was a genius you could accept he didn’t run Apple to enjoy only during his lifetime.  His genius built a legacy that has lasted for decades and will last for several more decades.

At current valuations the market is giving the stock away.  In the face of tremendous sales strength right now and an amazing product portfolio as well as a moat around their ecosystem the stock is weak today.  I predict this won’t last very long and the stock will make new highs as it heads to $1000 and beyond.  I’d put the odds on this happening at 100%.  I have no doubt and have put my money into this conviction a long Apple shareholder.  I will not fall victim to the confirmation basis of a declining stock price as in my view it does not in any way connect with reality and facts.  Ultimately earnings drive stock prices and earnings will be going way up.

Apple $1000: Why Doug Kass will miss the next 50% move | Bullish Cross

Apple $1000: Why Doug Kass will miss the next 50% move | Bullish Cross.

 

A must read for every apple bull and bear.  I 100% agree with the points Andy makes here and am thankful somebody is saying it and calling these jokers out

Categories: Finance and Stocks

Fantastic piece calling out Kass and others. Enjoy!

Categories: Finance and Stocks
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