Gundlach: Apple a 'broken company'

Really? Wall St. sophistry at its finest. Photo: T. Ponick

WASHINGTON, January 24, 2013 – As Apple takes another spectacular pounding today for what amounts to perfectly great earnings, the predictable pro and con blathering by “financial pros” is now at a fever pitch both online and on the telly. Negative remarks getting the most media play, as usual.

Longtime Apple fan and CNBC’s favorite financial entertainer Jim Cramer, still positive on the company long-term, thrashed about in agony this morning on CNBC’s “Squawk on the Street,” trying to get a handle on it all.

“’I could argue that $458 is a good place to step in. It won’t trade at six times earnings for long,’ Cramer said, perplexed that Apple was trading at the same ratio as Microsoft, which he sees acting more like a utility company than a tech behemoth.

“Apple ‘should not be trading at the same multiple as Microsoft,’” he said… ‘It’s just not fair.’”

Fair or not, there it is. And the Negative Nellies are piling on with “I toldja so’s,” as evidenced by the contra-Cramer remarks of DoubleLine Capital’s CEO Jeff Gundlach, who called Apple “a broken company,” with his firm “suggesting” that AAPL’s “stock price could drop to $425 per share.”

There’s a brave pronouncement. The stock has already bounced off $450 this morning on gargantuan volume. It’s logical that a bit more downside could be in the picture as investors clamber out of the stock in a spectacular selling panic.

But “a broken company?” What does that even mean? Is Apple as bad as serial disappointer Sears (SHLD)? Are its prospects as crummy as Best Buy (BBY)? Is it as directionless as Microsoft (MSFT)?

What does “broken” even mean when it comes to Apple?

With its latest quarterly net income standing at $13.81 per diluted share, Apple’s powerhouse earnings are only a few pennies less than the year-ago quarter. Gee, we should all be as “broken” as Apple. It continually astounds the Maven that Wall Street gurus like Gundlach should become rich beyond avarice even as they make mind-bogglingly stupid pronouncements like this one, even though Gundlach took care to favor his headline-grabber with the usual cautionary verbal buffers.

Meanwhile, analysts—many of whom had been predicting AAPL would soon hit $1,000 per share were busy red-penciling their earnings estimates this morning. Guess being spectacularly wrong still makes the big bucks in New York City. Mayor Bloomberg is probably the best example of this, but we digress.

According to CNBC, “price targets on Apple were cut at many top banks, including Goldman Sachs, Deutsche Bank, Credit Suisse, UBS and Oppenheimer. Goldman kept Apple on its conviction buy list but cut its target from $760 to $660, Deutsche Bank maintained a buy but moved its price target from $800 to $575; Credit Suisse listed Apple as outperform, moving its target from $750 to $600.” Funny. It wasn’t but a couple of months ago that these same analysts were predicting the sky was the limit for AAPL’s share price, even as some glitches in the company’s supply chain became evident.

Bottom line: all these financial pronouncements, clearly based on wild guessing at this point, are stuff and nonsense. Apple’s massive price drop over the past quarter—and particularly today—reflects more a confluence of events than it does any fundamental issue with the company. Even as the stock tanked big time this morning, investors and pundits alike completely ignored the company’s hugely impressive earnings—you heard it here first: earnings—that continue to dwarf most of the numbers coming out of Wall Street this week.

What’s going on behind the scenes: legacy snarking

The real problem with Apple, at least currently, is the fact that the stock acquired the status of an Olympian god over the past few years, transforming tech’s one-time ugly-duckling—worse as a company in the pre-Jobs 1990s than even the pathetic Dell is today—into a “must hold” investment for index funds, hedge funds, mutual funds, sovereign wealth funds, and individual investors alike. The stock was hugely bid up in the process of becoming “over-owned” as they say on the street. That is, AAPL became a stock that everybody was accumulating but that nobody would sell.

Gradually, AAPL became so over-owned that investors’ huge positions in the stock acquired the reverse tinge of a stock that’s over-shorted, subjecting it to the long version of a gigantic short-squeeze; the latter occurring when so many people are short a stock that any substantial buying in the name will cause the shorts to start bailing out, which they do by buying. And if more and more shorts start buying to close their position, more and more are forced to do the same, creating a genuine buying panic (i.e., “short squeeze”) that drives prices radically up.

In Apple’s case, just the opposite happened. Markets had been willing to give the company the benefit of the doubt after the genuinely epic figure of Steve Jobs tragically passed from the scene. But when current management slightly fumbled the introduction of the iPhone 5—including the astonishingly botched intro of the Apple Map App—and when rival (and patent thief) Samsung’s own aggressive product intros began to erode the iPhone’s much-touted advantages, a few people started to bad-mouth Job’s successor as CEO, Tim Cooke, while dumping some of their stock.

The me-too financial media picked this up. Let’s not forget: most of these guys, particularly the Boomers and older Xers, grew up touting the virtues of “good enough” PCs and their “good enough” operating system, Microsoft Windows in its various graceless incarnations. Contrariwise, they made a business of trashing Apple’s Macintosh products, busying themselves in idle moments by making predictions as to when AAPL as a company would finally give up the ghost.

One of the worst of the company’s detractors, BTW, was Michael Dell. In fact, it was Dell who, right around the time of Jobs II’s return, happened to be riding high selling his cheap, graceless PCs; which in turn seems to have prompted him to snarkily urge the industry to put Apple out of its misery already. We like to think that Dell’s chest-puffing hubris was the final straw that really pissed off Jobs, causing his already mega-alpha psyche to re-craft Apple into the greatest early-21st century tech company in the world, eventually blowing Dell and his company into the oblivion they’re currently contemplating.

Yet Dell wasn’t the only smug techie who wanted to bury Apple. Most in the PC press were as fond of dissing the company as the Obama Administration is of blaming every earthly ill on George W. Bush. Smashed into silence by the Jobs/Apple juggernaut, the PC press became reluctant fans, eventually morphing their coverage into a kind of astonished idolatry. This latter move—which also engulfed most analysts—was just as stupid and ill-informed as their early PC idolatry, proving that technology media elites are just as prone to lemming-like behavior as are their politically correct counterparts in various so-called news organizations.

Thus, when Apple finally appeared to have stumbled a bit earlier last fall, the old anti-Apple, pro-PC DNA began to reassert itself in the financial media. Freed at last from Steve Job’s legendary “reality distortion zone,” the financial press as well as bearish and permabear analysts started badmouthing Apple’s stock, with some predicting its permanent demise, just like they did in the 1990s.

The revenge of the PC pundits. (And the fiscal cliff.)

Difficult to grasp at first, these difficult undercurrents we’ve just described began to undermine the near-universal support for Apple stock early this fall. Soon, however, another key ingredient was folded in, transforming the legacy anti-Apple grumblings into the Perfect Storm. And that key ingredient was the “fiscal cliff,” the post-election obsession that refused to leave the stock market alone.

When Barack Obama laid claim to his second term late on the night of November 6, 2012, even as Republicans continued to dominate the House, everybody converged on the sudden realization that those arbitrary and draconian budget cuts and sequesters, put in place last year allegedly to scare Congress and the White House into budget compromise this year, would almost certainly happen on January 1, 2013.

Worse yet, with another four years of a Socialist White House, investors, funds, and advisors of all stripes also realized that the special tax treatment of capital gains could very well be eliminated as well via almost any conceivable variety of compromise legislation. Or at the very least, the low, low long term cap gain tax rate of 15% might be increased to 20% or above. This suddenly created a very real imperative to take capital gains if you had them. Right away.

Hence, the serious bout of post-election selling throughout November and the bulk of December, not to mention the “special dividends” (also tax favored in 2012) that suddenly materialized in December. They, too, could be taxed to death in 2013.

And which stock proved to be the perfect target for selling late last year? You guessed it: Apple. Remember when we said it was over-owned? Well, it was. Everybody and his brother had at least a few shares. Hedge funds were massively invested in it. It represented an oversized percentage of QQQ (the S&P subset ETF that perhaps best represents tech stocks), and mutual funds, 401(k)s, pension funds, you name them—all were loaded up with AAPL. So when the undercurrent of negative press started the sell signal cooking, when the Apple Map App proved that AAPL could indeed become mortal on occasion, and when the reality of what voters had actually done began to sink in on the evening of November 6, the already steady stream of AAPL selling quickly gathered into a tsunami-dump of epic proportions.

Yes, there were a few brief respites, and some good trades were there to be had, particularly in in-the-money AAPL calls. But AAPL’s once invincibly positive upward momentum had been decisively broken. By the beginning of this month, as far as the financial punditocracy was concerned, the Jobs magic was now permanently gone. Apple would never innovate again. Samsung and Android phones would wipe out Apple’s elegant iPhones forever. The Mac would die. (Again.) iPads and iPods would go the way of the dinosaurs. Apple TV would never happen. And innovation would forever vanish from Apple’s Cupertino campus.

Thus, at least temporarily, we now have The Revenge of the PC Pundits. Once again, they’re in their element, trash-talking Apple once again even as Dell itself, exhibit A, sinks into PC oblivion. When you look at a situation like this, you just have to figure that it’s a Forrest Gump moment: Stupid Is as Stupid Does.

A saner take on Apple’s fate

No company is likely to be able to sustain in perpetuity the blistering pace of product introductions and innovation that Apple churned out relentlessly, circa 1999-2011. Not even Apple. But what’s wrong with still making a ton of money, even if margins begin to retreat slightly? Who actually earned more per share than Apple in the last quarter? Right. Nobody.

Looking ahead, on a worst case basis, Apple could eventually end up  coasting along like Microsoft, transforming itself into a boring yet stable bread and butter company that pays a decent dividend to stockholders hoping to benefit by said payout when they retired.

Yet even this worst-case scenario is still quite a way off in the future, if it ever happens. Though it may not be in this position forever, Apple is still the greatest company in the world at least at the moment, taking into account its earnings per share and the substantial pace of corporate growth that yet in all likelihood remains. At a PE ratio of plus-or-minus 10, it’s also a tech stock that even now promises vastly more growth than the average no-growth bank, most of which cluster around that same tepid PE level.

So talk of Apple’s death is greatly premature. And calling Apple, with its earnings at $13-14+ per share (diluted and undiluted) a “broken company” is pure sophistry, meant to garner scary headlines that please editors but little else. The only thing that’s broken right now is AAPL’s per share price. And the reputations of quite a few analysts who don’t really care anyway as long as they get their bonuses.

If you had previously owned Apple in your portfolio but no longer do, you were probably glad you’d gotten out whenever that might have been. Contrariwise, if you’d like to own Apple today, now is probably not the time to get in. Too dangerous. Too many gurus and analysts wiping egg from their faces and set on revenge. It’s a hugely irrational moment.

But once the nonsense is over, once all the shouting and bogus chest-pounding has died down, and once the bearish Wall Street idiocracy stops talking its book on this issue, AAPL will still remain a cheap stock by any sensible yardstick. The next quarter or two will likely bear this fact out as the company’s supply chain stabilizes and as the new 27-inch iMacs finally come online, something that didn’t happen until January 1 and something the talking heads failed to notice. Not to mention a cheaper iPhone, perhaps this spring, to go after Samsung head on.

Once these stories and others begin to leak out, and/or once AAPL takes over another company or two or launches an “unexpected” new product, it will likely be safe to get back in.

As for now, watchful waiting is the order of the day. Although today’s closing stock price of $450.50 at the market’s 4 p.m. close may seem tempting, it’s best to treat AAPL as if it’s radioactive now, at least from the standpoint of a small investor. If you’re stuck in an existing position, you may want to consider insuring it with puts, or covering it with calls rather than taking a tremendous red ink bath just because the stock is likely hitting bottom.

But keep your eyes open. When the TV idiots have finally finished their nonsensical beat up on this stock and moved on, it’s likely that AAPL will be ready to reward new holders with another swell ride upward. Maybe not as exciting a ride as the last time. But, with a PE of 10 or less, a dividend of 2.5% or more, and tens of millions of products delighting and satisfying customers around the globe, the next ride on AAPL could still be pretty good.

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.

Any positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any ar500ticle under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.

Follow Terry on Twitter @terryp17



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Terry Ponick

Now writing on investing, politics, music, movies and theater for the Washington Times Communities, Terry was formerly the longtime music and culture critic for the Washington Times print edition (1994-2009) before moving online with Communities in 2010.  



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