Thoughts on Apple and Latest Porfolio Actions

Up until recently I have been adding Dell, Intel and Western Digital. I added more Intel specifically yesterday and if I have the opportunity the position will probably grow. Now that markets are becoming more focused on the US fiscal cliff I might have a chance. Low prices could come, specially with the help of another possible US recession on the news. In other words, the fiscal cliff could be a perfect catalyst for uncertainty, fear, and market declines.

I bought those companies for some family members whose portfolios I manage. I have been taking US$ debt in order to make several of those and previous investments. That’s equivalent to shorting the dollar. That debt is fully covered by Euros that are at bank savings accounts which give more or less 2% depending on the bank.

One of the many reasons I like Intel is because it has most of the world computing power and its own semi conductor fabs to adjust to market changes. They design, build, and sell their products. Not many do that. They control the whole supply chain, and even make some of the machines to put on their fabs, the rest are bought to companies such as Applied Materials, which I also own. Applied materials, no matter who wins on the product side will sell their machines. Intel’s competitors do not own their fabs nor have the knowledge to make them. I think that the stock has fallen because of ARM’s power efficient processors and products from Apple that have been taking share in mainly low end computing machines.

Intel’s focus now is on power efficiency. I’m sure it will catch up because of their history, good R&D and deep control over the supply chain. It’s right now building two fabs. Each is worth more than 5 billions, those costs are comparable to nuclear plants and the knowledge to build them is unique. Those plants are made to compete. They are several years ahead their competitors, they can build up to 14 nano-meter processors and are backwards compatible to build using any older or bigger nano-meter size.

Apple has a big fan base but also a lot of their users are not fanatics. Fans might be growing less due to competitors products and access to good alternative options at low prices. That should be estimated if you plan to invest with them. Their competitors are getting good and many sell at or below cost. Personally I do not feel comfortable in general when I invest on high margin products that rely on fanatics or fashion, specially not when I see low barriers to entry.

It’s products are difficult to upgrade, in some cases not even the ram memory can be changed. The only upgrade possible is buying a new product and I guess their own fans could get tired of that business model when they see newer and better gadgets constantly being offered.

I also do not feel comfortable investing when earnings are at their peak and have my doubts if they can be sustained. P/E seems low because E is at a historical peak. But normalized P/E is quite high, too high for my taste. That said I would not bet against Apple, but also not for it now. Bruce Greenwald summarizes well the risk associated to investing in Apple:

I am not sure what Apple can do with its money, it can reinvest it making more iPhones, iPads, or iTV’s etc.. I’m not sure that will work anymore so good because of diminished returns on product experience and due to the huge competition that caught up quite well. Basically all tech companies are making products that can do the same as Apple’s, maybe not as nicely yet but that can change and is already changing. Some companies as Google or Amazon sell their hardware at or below production cost. Apple can not do that without eating its cash and margins. As competition, pessimism and doubts grow bigger maybe it should wait for a good opportunity and simply buy back a big bunch of its shares. Unfortunately doing that could send the message that they do not have anything better to do with their cash. I’m always wary and do not over emphasize dividends or buy backs.

My ideal type of company is a compounding machine that reinvests most in their business increasing their rates of return. In the recent years Apple has done a good job in that sense but cash starts to get too big, hardly offers any yield, and it’s not clear how they can profitably use it. Having too much cash in a company makes me nervous. It reminds me of Microsoft when they almost used their cash to buy Yahoo. Fortunately for Microsoft Yahoo declined the 40+ Billion offer. Then they decided to invest several billions in search, billions that have recently been written down. Finally they spend billions in buying Skype, not a great investment if you ask me. It also reminds me of how Hewlett Packard managed to spend more than its current market capitalization in the last few years. Mainly doing bad and big acquisitions. Hopefully Apple will not do the same with their cash, there is no reason to think they will. But there is also not many reasons to think they know how to use their excess cash, specially when you see how it keeps on hoarding to almost ridiculous levels. That’s why sometimes I think that the best that they can do is to give it back to their investors.

Google sells hardware at cost to get market share because their income is in advertising and they are interested in massive adoption. The android smartphone market share is constantly growing, quite fast. Billions have been invested by Microsoft and Yahoo to dethrone Google from the online ads market. It has not been possible. Even many more billions are now invested simultaneously by several high tech companies to dethrone iPhones and iPads. The smartphone and tablet consumer choices are now hard to keep up with. The outcome could be painful to Apple. Maybe not, but I doubt it too much to invest on it.

Amazon is interested in selling things such as books and they sell their devices probably at cost to get more readers. Like telecoms, they basically subsidize or give away hardware in order to grab market share for their other more dependable sources of income.

Even Microsoft is selling tablets and phones now. They can arguably be worse than Apple. But it can hardly be denied that that adds to Apple’s competitive pressures.

Apple depends on companies such as Samsung to get their chips. A company which they sued recently, that does not look too reliable to depend on. Apple could work on getting vertically integrated to build their own hardware and processors but that requires money and time. Worse of all that requires knowledge in areas where they do not have expertise. Maybe they could buy a company to do it though. Who knows maybe they buy Intel. I doubt though that they are interested and at a 100 billions dollars or more it could be too expensive for them.

Apple has been dependent on cheap Chinese workforce subsidized by their government. That can change any time. It is already getting quite more expensive to manufacture in China. As China gets more developed that advantage will be lost. I try to avoid investing in companies that benefit from a politically subsidized supply chain. Like Apple’s case through Foxconn. That dependency, if you ask me, is not reliable nor sustainable.

Please do not take my words too seriously and trust your own research. I have thought about and researched Apple because it’s in the same ecosystem where some of my investments are. I have chosen to invest in other options I feel better about. I respect Apple and agree that the company has done a great job until now. Both for them, for their investors and their customers. It has set an excellent high standard for others to follow. Their sales have grown at an amazing pace. I just have too many doubts about its future as an investment. With so many competitors and choices on the market one thing I do not doubt so much about is that the consumer will be the winner.

Cheers!
jrv

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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14 Responses to Thoughts on Apple and Latest Porfolio Actions

  1. Kainvest says:

    Jrv, good analysis!

    As you know I am an Apple fan and Apple bull, its valuation and the ecosystem built by its product family make a strong fundamental case.
    However, I recognize that it is technically broken and in a tough market right now.

    http://blogs.marketwatch.com/cody/2012/11/08/cody-willard-answers-your-apple-questions/

  2. jrv says:

    Hi Kai,

    Thanks for the link, I left a comment on its Q&A.

    I’m not sure enough about Apple’s long term to support it. But as of now it’s huge cash amount acts as a powerful wall against further declines. That’s a reason why I would not bet against it.

    The cash hoard acts as a powerful safety margin. It would not surprise me that lots of people would jump in to support it if it keeps falling.

    Anyways I try to never say never, if it falls enough, I might even consider getting in.

    You sincerely have my best wishes regarding your investment there.

    Cheers!
    jrv

  3. Mike says:

    Hi Jrv,

    AAPL is probably in a lot of trouble long term if they don’t come up with a totally new product soon. I just don’t see how long their customers will continue to buy the new iphone and ipad, etc “just because.” I know people who have all 5 Iphones and are starting to complain that Apple is trying to rip them off with useless upgrades to the phone. But it probably will go back to 600 in the near term.

  4. jrv says:

    Hi Mike,

    That’s one more reason why I don’t feel comfortable investing there. I would also get annoyed if I buy a gadget and then the same company a few months or weeks later offers a better one. Or a marginally better one for the same price, or cheaper etc …

  5. Kainvest says:

    I personally ordered my 3rd iPad (mini) on 11/1 on Apple Store online. It won’t be delivered until 11/23. It took significantly longer time for my order on the new iPad in March. My family is just hooked on iPad – every one has to have one. That is just me … or like every one else?

    Though AAPL is oversold IMHO, it really can do much in a lousy market.

    http://seekingalpha.com/article/995631-the-real-reason-apple-keeps-going-down

    http://seekingalpha.com/article/996511-has-apple-finally-bottomed-out

  6. jrv says:

    Hi Kainvest, How much have you spend on iPads in total ? My father and some of friends also love apple products. I find them great too. Basically I just use a netbook with linux that does all I need. The rest of my family uses a PC I built (also with ubuntu/linux) with a huge screen and satisfies their needs. Ahh I also love and have used a lot Freebsd, a Berkeley Unix branch, which is the operating system base of Apple computers.

    One reason I do not like to bet on Apple now is because I suspect that there might be an enthusiasm bubble on their products. That has led to record fast sales and record fast earnings. Since Earnings are a multiple times higher than just a couple of years ago the P/E seems low. They filled a niche when there was no competition and did a great job giving an example of top product quality. Given the alternatives getting much better I have doubts that the enthusiasm and earnings can be sustained in the long term. Note that I do not think there is a bubble on the stock price but that there might be a bubble on the company earnings. And if they fall, it could be a problem. Maybe I’m wrong but since I have too many doubts I rather pass for now.

    I got the habit years ago of selling and maintaining PCs. I find them easy to upgrade, powerful and cheap. I’ve spent almost nothing on computers of any kind. I prefer to buy some cheap and good stocks than an extra computing device, but then again, I do not think that that behavior is widespread :)

    The customers now certainly look like the winners with so many computing choices of every type and cost: smartphones, Ultrabooks; iPads; PC’s; Notebooks; Tablets; Surface; Nexus; Galaxy …

    The market might get a lot lousier with competition and the fiscal cliff around the corner. I hope it does, maybe like that I can change cash for some more cheap stocks.

    Thanks for the links!

  7. Anonymous says:

    Hi Jrv,

    Yes great analysis! I’m a stay at home mom with 3 kids and failed miserably a decade ago and once again after that in the market. This year i’ve been vesting my time to reading and learning lots about different techniques in trading and analysis. One of the stocks I had particularly been interested in was Intel and have been analyzing and reading about it for a while..essentially from April and had been waiting for a gradual entry at the right time for me that was now with seasonal tax-loss selling underway.
    I’m glad I found this site and after reading some of your blog I’m even more confident in buying this stock.

    Best Regards,
    Sue

  8. jrv says:

    Hi Sue, I’m glad you liked the blog. I also had losses during the internet bubble and I’m also a stay at home parent with 3 kids :). Feel free to let me know what other stocks you like.

    Cheers!
    jrv

  9. Anonymous says:

    pc has its fans and ecosystem. Apple has captured its fans thru its own ecosystem.

    I have purchased both kindle fire and nexus this year. It is hard to believe, I sold them shortly. Actually I sold nexus in a day or two after I got it.

    They are really no comparison to apple IMHO .
    Maybe it is just me.

    Another story is that my iPad mini ordered on nov 1 still has not reached me yet because it is lost by FedEx , in other words, it is a hot item … Someone intercepted it. Apple reordered one for me a week ago which will be sent to me in two weeks.

    Given iPhone is starting sale in china… Next couple of quarters should be good … And we will see how it goes from there.

  10. Anonymous says:

    Wow thanks for the quick response!

    Unfortunately ill be working again in a few months…not looking forward to it, but should be thankful! At the same time have been hoping for a market crash so I can buy on the low…I couldnt stop laughing at the similarites and when I read more about the great year you had!
    As of late I’ve been trying to learn about shorting stocks and etfs…the killer one for me in which I lost a lot was UVXY. But I must say I also did make a lot (Imean A LOT) with this volatility vehicle, I gained back all my losses from the tech bubble…you can just imagine the high I had… but didn’t follow my 2 rules : use tight stops and sell in May and go away. I continued to play this and with contango and low volatility I was severely crushed and lost it all again…I feel like I need to get back and recoup some of my losses from this monster but at the same time don’t want to risk any more cash on this one.
    At one point the rep from my trading platform had mentioned that you can’t short UVXY but reading whats on some of the blogs it seems like others are…and considering it eventually goes to zero I don’t understand how shorting this can be a risky trade.
    Another stock I’ve invested in the last few months since summer has been BAC Bank of America…I’ve been doing alright with that one as I’ve been gradually buying it from the 7.25 price point to 9. Just wish I had more of it!

    Sue

  11. jrv says:

    Apple’s products are quite nice. But they have too much competition and the huge amount of cash they have accumulated is a sign that they do not know how to reinvest it. I do not feel comfortable investing when the company is at record earnings and I do not see clear enough how its future will be. I would not bet against it neither though.

  12. jrv says:

    Hi Sue, I have never shorted the UVXY. I have a friend who does it on a daily basis but always closes his shorts on the same day for some settlement reason he has to. What I have shorted is the VXX, actually I still have a short I made in 2011. BAC could be a great investment, at least Warren Buffett thinks so. I am indirectly benefiting from it via my Berkshire shares.

    Hope you enjoy your new job, what is it about ?

    Best wishes!
    jrv

  13. Kainest says:

    Shorting Uvxy can be dangerous In the beginning of a market meltdown when contango turns to backwardation. The backwardation could last pretty long. last year it lasted from August through November. TVix tripled in the period, I think.
    Besides, margin Requirement on those leveraged efts are usually 100%. Other than those extreme periods, shorting them Makes a lot of sense.

  14. jrv says:

    yep that’s why I like shorting small amounts or when volatility is at historical highs all along the futures curve

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