I have a confession to make.
Am I being compulsive?…impulsive?….or foolish?
Perhaps it is all three considering that Apple has risen more than 3,000% in the last ten years, turning almost any attempt to go against the grain into a "widow maker" trade.
I say almost because I am one of the lucky ones.
A few weeks ago I recommended my Strike Force subscribers purchase put options on Apple, effectively shorting the stock. That resulted in a 47% profit in less than 24 hours for anyone who followed along, excluding fees and commissions.
I'm not alone in my thinking.
Uber investor Doug Kass, general partner of Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP, tweeted recently that he had covered "half his short" on Apple following the announcement of their dividend and buyback plan.
Given that the stock had run up to nearly $608 a share before the announcement, presumably Kass had banked some gains, too.
7 Reasons to Short Apple Stock
I haven't spoken with Mr. Kass so I can't comment on his current thinking nor the specifics of his trade, but here are mine:
- The company has single-handedly repeated the bubble curve of the Nasdaq run up. That leaves a lot of empty space to the downside.
- Apple is a "fad" or a "hit" company, meaning that its price seems to correlate to new product launches rather than the sustainable development of key product lines. Companies that do that tend to fall back from orbit at some point – especially in the tech world. Palm and Research in Motion (Nasdaq: RIMM) are two that come to mind.
- When great leaders are gone, their legacies can struggle. While Apple has stood up so far following Steve Jobs' unfortunate death, I can only wonder, as many in the tech community are wondering, how deep and how far out his thinking will live on. Is it one product cycle, two cycles? Nobody knows. But we do know that Microsoft (Nasdaq: MSFT) became a very different company after Bill Gates stepped aside. Intel (Nasdaq: INTC) also flatlined three or four cycles after Andy Grove's departure from day-to-day operations.
- Apple's short interest of only 9.8 million shares is very low considering the company's three-month average daily trading volume is 18.2 million shares and the company's float is 931.8 million shares.
- The analyst community is almost completely positive. That's usually a sign of two things: a) that they're soft peddling opposing trades from other parts of the "shops" they work for or b) that they want a run up to maximize profits from positions they already hold. Either way, many have been tremendously wrong in their sales projections in recent quarters, understating anticipated results by as much as 30%-40% – a factor also noted by Kass in his trade set up analysis. Therefore, I am skeptical that they are raising numbers again.
- Apple's profit margins are unbelievably high at a time when the rest of the economy lurches along. While that's not a bad thing in isolation, I have a hard time believing that Apple can remain so far out of line if for no other reason that what goes up must come down eventually. And, since the road higher is far more unlikely for the rest of the markets, it is logical that Apple likely heads lower in the short term.
- Apple's fundamentals may soften. There are lots of reasons to love Apple but there are just as many reasons things may not be what they seem. If the economy worsens just how many people are going to buy "gee-whiz" technology beyond the hard core Apple-heads? Is there an Apple-killer in somebody's garage right now? Anti-trust investigations and supply problems are also big what ifs at the moment. Even a carrier failure could rock Apple because it may be their subsidies that keep Apple's costs down and profits high.
Add it all up and there is enough to make you go hmmm…
Of course, there is no doubt I will incur the wrath of Apple fans everywhere and arm chair traders from here to Tibet.
Get over it guys; please refrain from the snarky e-mails telling me I'm an idiot or out of touch or worse – I believe in Apple. I really do.
What I am suggesting is simply the logic behind Apple as a trading opportunity for nimble, aggressive and like minded market mavens.
Besides, if I am correct and Apple does trade lower in the weeks ahead, I'm going to be picking up shares as an investment.
I hope you will be buying too.
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About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.