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Saturday, January 22, 2011

trading dynamic of AAPL

Last week was not kind to AAPL. It pulled back about 7% from its absolute high (351 in after hours, to 326). I made no secret that I was buying as it pulled back because the stock is already being discounted by the street.

If a discount was not present, AAPL would be trading with a higher multiple, more like GOOG, especially considering the growth they are seeing withing the Asian markets.

The street chooses to be inefficient, so I am taking advantage, but realistically of course. The pattern I have observed was that AAPL trades within a defined trailing PE of 19-21ish. (I use the band of 19-20 to be conservative.)

Make no mistake, the street will try to find a reason for this discount, and it is seen via articles like this from the Wall Street Journal. Within this article, a Columbia Professor no less, makes the absolutely incorrect assessment that 'open always wins'. The example he uses within his article are completely wrong (ie Microsoft) and the assessment of 'open always wins' is complete and utter bullshit. Microsoft Windows, Office are not open but won their era's race because they provided usability. Linux open operating systems existed as did open office suite programs at the time, but none caught on because 90% of users do not care about openness. The argument is not about 'openness', it is about consumer usability! (I expect more from a Columbia University Professor.)

Regardless of the bullshit commentary that is being circulated, the fact remains AAPL's trading behavior looks more negative than I think it really is. Let me explain, and bare with me.

With the blow out earnings, AAPL's trailing PE band of 19-20 gives the stock price a range of 340-358. Unfortunately for current holders of the stock, the computers were not recognizing this last week. Anyone using a quant, and is connected to the same data feed as Yahoo Finance or Google Finance (which are a lot of them), would have seen AAPL's trailing PE around 22. I would not be surprised if they had a logic function to sell it due to a higher PE verse its pattern after reporting earnings. The stupid managers that oversee these quants just listen to the system, and sell some of the position (and there are plenty of them too). The selling starts breaking intra-day support, triggering 'momentum-whores' (who can care less about valuation and only care about how the chart looks) to sell.

Now AAPL is in a situation where it is trading at a trailing PE in the 18s. Fortunately for the current investors, the central data feed is now accurate, and I believe a bunch of quants will highlight AAPL cause now it is trading inefficient to its pattern.

You might think the above assessment is bullshit, and it may very well be me talking out of my ass. But with 70% of the market's trading taking place by quants, I am simply trying to understand how they think too. (It is just another variable in the current era of trading we have to deal with.)

Regardless of the assessment, AAPL is very very inexpensive right now. With $60B in the bank, that equates to some $65/share in cash. The current stock is valuing AAPL's business to be worth $261 per share. Not to mention AAPL's long-term trend is still very much intact.

(IMO, this is too inexpensive for even Apple to ignore. Their best capital allocation at this point, without hindering R&D, would be to announce a $30-40B buy back. Unfortunately, I think that news will go hand-in-hand with some sad news to society.)

Funny Note: As I am writing this post I am watching Terminator Salvation. I thought the irony is amusing. And no, the show did not give me the inspiration to write it, I was thinking about AAPL's trading throughout last week as AAPL was declining :)

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