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Thursday, February 9, 2012

AAPL - discipline's tragedy

I have a problem. My problem is discipline. I have too much of it. Many years ago, I got burned, hard, because I gave caution to the wind. Ever since then, I have been trading with a lot of discipline.

Over the last few years (yes, years) I have been very bullish on AAPL, and it has treated me well in return.  Most recently, I have consistently highlighted Apple's trading range, why it was a good buy entering its report and pointed out gross hypocrisies from Cramer and other media folks.

All my bullishness, prior to this point was in the face of market inefficiency, causing a severe discount to the stock.  But the entire argument was predicated on realism.  A few months ago, I highlighted why I believe Apple should, at the very least, trade with a market multiple.

My points of consideration include:

1. Already the largest investor base. (Everyone owns it.)
2. Product growth trends
3. Revenue and earnings growth rates
4. Potential product growth drivers
5. The market has never seen a situation like AAPL

That thesis, imo, hold very true today.  Apple's biggest problem is the large investor base.  Everyone who wants to own it, already does.  And the dearth of value managers who did not own it, bought it when the multiple was between 12.5 to 13.5. Hence, the 8-9% appreciation since the quarterly report.

A good argument can be made between Apple's growth rate and multiple, to show the undervalued nature of the stock, but that argument was valid for the last two years as Apple's growth was accelerating yet its multiple was compressing, and the argument meant nothing. 

An undeniable fact still remains, a stock needs demand in order for its multiple to rise.  When Apple reported its blow out quarter, that created demand. Any value boy worth his/her management fee could not ignore the stock's valuation. The stock was trading with a trailing PE of 12.6. So the stock appreciated.

Apple is currently trading at 493, which gives it a trailing multiple of slightly above 14*.  The value boys/girls who were buying it will no longer do so.  New value players will need a new reason to buy the stock. (These same players did not care for the company's growth before, they will not care at current levels.)

New players will need a dividend, or Apple to continue to perform quarter-after-quarter (and be late to the game). (After all, the late players still managed to see a 40point move 'after-the-fact'. Not bad for the late comers.)

Aside from the above argument, which is predicated on the mechanics-of-the-market, there is also technical reason I am cautious here with Apple.

The stock has approached a very cautious level of overbought conditions, as highlighted by the Slow Stoch.

The story is the same via the weekly chart.

So I am of the camp that Apple needs to consolidate at current levels.  After reading that statement, do not think for a second that I am bearish on Apple. I am a trader, I do not simply buy and hold, even though I conduct heavy fundamental analysis that can point to such action.

For instance, I truly think Apple will be a $600 stock by the end of the year, so for any buy-and-hold person out there, do not sell.  However, I will be actively trading the stock, again, once it consolidates.  Right now, I am just waiting.

*The reason I use the trailing PE of 14 is because that is the expected market multiple and where Apple has been normally trading at for the last few months.

(Any 'new' person to this blog reading this and think this is me simply hating on Apple please go to the search box and search "aapl" or "apple", and read for yourself.)

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