Diary of a Financier

Apple enters the value range

In Capital Markets on Thu 18 Apr 2013 at 16:33

Back in early March, I discussed Apple’s (AAPL) fabulous collapse, which I compared to other latter-day momentum darlings. I had selected Green Mountain Coffee Roasters (GMCR) as the tightest-fit analogue, and that remains the case today. Now <$400, AAPL has entered the value range from both a technical and a fundamental perspective, so I wanted to update my strategy regarding how I’ll play this.

Closing today at $392, AAPL is still not a raging buy for me, but it’s mighty close. My plan was rather lucid:

“When I model the dynamic valuation, I could stomach buying with a margin of safety down by the $380 level… my tradable, final support target looks like it should be reached somewhere >$350.”

Compared to GMCR (July 2012), AAPL has traded according to the requisite falling wedge, upon which trendline support it rests today. In addition, you’ll notice the bull divergence of daily indicators, which advertises an increasingly more constructive sentiment toward the name:

GMCR v AAPL daily- falling wedge breakout after bull divergence

GMCR v AAPL daily- falling wedge breakout after bull divergence

Fundamentally, AAPL is down to a 0.44 fwPEG (0.43 ttmPEG) v 1.23 SPX PEG. At this point, the stock has priced-in the [implicit] mea culpas that’ll arrive when analysts pare their growth projections. Sure, say AAPL will not continue compounding growth on growth. Maybe the magic’s gone, and the company’s innovators are gone.AAPL fundamentals (2013.04.18) Halve their growth rate by taking 5y EPS growth down from 18.98% to 9%, and AAPL is still trading <1.00 PEG (0.90); you’ll have to cut 5y EPS growth by more than two-thirds to 6.6% before AAPL reaches PEG parity with the broad market.

The cash is an issue. It’s a drag on the balance sheet and their growth rates, plus it’s alarming that they’ve wasted over 3 years now, having not found a project(s) with a rate of return worth the investment. I still hope AAPL flips the Street the bird by announcing a corporate strategy of forgoing the short term for long term, a la Amazon (AMZN) or Google (GOOG). Tim Cook is not the innovator (read: kleptographer) Steve Jobs was, but his legacy could’ve been something entirely different and [almost] as mythical: he could’ve bucked the short-termism; he could’ve ended the treadmill of faster and faster product cycles by thinking years ahead and using AAPL’s gift of cash for true investment.

Regardless, I’m a buyer around $380 (down to $350), where I see a technical and fundamental margin of safety. I will not catch the falling knife, but I’ll wait for a bottom formation. I expect I’ll have time too. Now that many of the hedge funds have been purged of their outsized stakes, AAPL is working through the progression I expected:

“I’m interested in establishing [a position] when AAPL might be so beaten down that its strongest-handed shareholders capitulate. At that point, a giant purge occurs. [You are here.] Everyone piles on the offer, then, suddenly, no sellers remain. The mainstream media will stop talking about the name, and nobody’s willing to admit they own shares anymore. Utter despondency. That’s when I want to buy.”

The $400 psychological level invited a return of the mainstream media coverage, but that noise will wane. At that entry point, the cash drag, the growth deceleration, etc all melt away. Even at the close today, the valuation says buyers don’t need innovative or disruptive new technologies from AAPL–we just need it to not be the next Blackberry (BBRY) or Nokia (NOK).¹ So, Apple, say goodbye to growth; you’re a value stock again.

–Romeo

¹I analyzed NOK & BBRY in my hunt for a “momentum collapse” analogue, and the charts aren’t consistent with AAPL’s.

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