Apple Turning Around

This morning, you likely received an email with Apple in the subject line and no content. I apologize for that! I was in a Philadelphia hotel room on the way out and I thought I hit “paste” and send. Obviously, my fat little fingers missed a step. When I received it on my phone, my first reaction was, NO! It reminded me of those unscrupulous Dotcom bubble stock touts who would send emails with either the company’s name or stock symbol and little else in the email. These were typically pink sheet or micro-cap stocks that could be easily manipulated. Traders and investors would speculate and buy the stock, forcing its share price higher only to allow the tout to sell into the rise. Some folks call this “pump and dump” and it’s been around forever in the markets. And it is illegal. Anyway, I certainly did not intend to just send the word “Apple” and I would never “pump and dump”! So I am sorry again.

When I got home earlier this evening, I wrote the article about Apple once again. This time as I hit send, the website froze and I lost all of work for the second time today. So I am wondering; is someone upstairs trying to tell me something?!?!

Without further ado, here we go on Apple…

For a long while, as you know, I have been fairly negative on Apple the stock, forecasting a possible 50% to 70% decline by the time the next bear market in stocks ends. It’s not about their products or management, although losing Steve Jobs is definitely a major negative, or any accounting irregularities. As my kids tell me, Apple’s products are incredible. Rather, this is purely sentiment call.

Apple has become a cult stock ingrained into our investing fiber. From a crisis low of roughly $78 to 2012 high around $700, this stock soared into rarified air in fairly short order. It’s the stock everyone is supposed to own according to the masses. Over the past year, whenever I offer a contrarian forecast, people scoff at the notion that their beloved Apple could decline for more than a few days or week. After media appearances where I forecast massive losses ahead, people post nasty comments about me online.

Apple has become the classic story stock of which there is at least one in every single bull market over the past 100 years. Google, AOL, Yahoo, IBM, GE, Exxon, Chevron, RCA, Xerox, GM, Avon, Navistar and on and on.

Can you guess the ONE thing they all have in common?

Ensuing bear markets decimated them 30%, 40%, 50%, 60%, 70% and even 80%! Now, some of those story stocks did recover, like Google, but not to the degree of the previous bull market. In most cases, the companies matured and their best rates of ascent were long gone.

I have heard all the nonsense about Apple’s price to earnings ratio being modestly at 12 and it’s actually severely undervalued. You know what I say? So what! Go look at the P/Es of the banks and homebuilders in 2006 as they hummed along. They were mostly SINGLE DIGITS! How did that work out for them?

Before you stop reading and think this is all just another hatchet job on Apple, stay with me please. While my forecast remains for a massive decline in Apple before the next bear market ends, Apple just hit my initial downside target of $500 yesterday. Why does that matter?

For the first time since June, Apple looks like it is in a position to rally smartly from its $519 close yesterday. At its worst, we saw a 28% decline from $700 to $500. Recouping half that would not be out of the question if the overall stock market remains stable. On the flip side, Apple is not “supposed” to close below $500. If it does, the short-term bullish scenario is out the window and selling will likely accelerate to the downside. That does offer a favorable risk/reward ratio though.

Some of you continue to ask why I focus so much energy on Apple. Simply put, it has such outsized weightings in the major indices like the S&P 500 and NASDAQ 100. As we saw over the summer, it can literally carry the market on its back.

For full disclosure and transparency, I do not directly own any shares of Apple. My exposure both personally and professionally is in positions we currently hold in the major indices like the S&P 500 and NASDAQ 100.

As always, I look forward to your comments and questions!

Paul

P.S. PHEW! I finished the article and got it posted without losing it for a third time!