Fred Hickey thinks Apple is headed for trouble.
Hickey is the proprietor of The High Tech Strategist, a monthly newsletter on stock investing and the financial markets. Fred lives in Nashua, New Hampshire, about as far as you can get in the continental U.S. from the legendary reality distortion field that tends to color the way people in the Bay Area look at the prospects for Apple.
Hickey is often bearish on tech stocks, and now is no exception. In the May edition of his newsletter, Hickey writes that he is "very concerned about the state of the world economy and the highly speculative activity in parts of the tech world."
The May issue of the newsletter includes something of a rant on the prospects for Apple shares which bears repeating. Fred isn't your typical Street analyst. He does not spend any time in the Valley, nor does he fly off to Taiwan to pry info on future products from players in the Apple supply chain. But he is an astute observer of the tech economy, and whether or not you agree with him, his words are worth noting.
Hickey notes that as of the writing of the May issue of the letter Apple shares were up over 70% in four months and 725% from the early 2009 lows. He also points out that he has not been a successful owner of the stock: he bought shares at 6 when the original iPod was introduced and then sold it shortly after. He bought at 90 near the 2009 lows and again sold too soon, and bought yet again at 150, and again sold to soon.
But he notes that he's also made some smart bear calls on the stock, riding shares down from 203 to 78 in 2008 and 2009. "Yes, even the greatest stocks can plunge 62% in bad market tape," he writes. "That's a lesson the Appleholics have forgotten."
And let me now hand things over to Fred (as written in the letter):
"After capturing part of the 2008 plunge (through put options, I never tried to short Apple again until last month when I purchased very short-term options. I bought out-of-the-money outs for $1.80 when the stock was at $640, but had rolled over from an intra-day high of $644. I was darn lucky Four days later I sold the last of them for $17.50.
While my put option positions on Apple were not large, the success told me a story: Apple's parabolic stock fever had broken - and it may be broken forever. If so, Apple's stock will continue to break down, frustrating the Appleholics who will buy on every dip, citing the 'low' valuations. They will buy it all the way down.
Only in hindsight (years later) will they know that Apple's $600 billion valuation could not be sustained, that Apple is a consumer product company subject to the whims of consumers. That Apple sells commodity type products: phones, PCs and PC-type products (tablets) where margins could not possibly be sustained at current levels. That its biggest customers (carriers such as Verizon and AT&T) would gladly leap at the chance to sell a competitive product that offered higher margins (lower subsidies to Apple.) That Apple's brilliant product designer and marketer, Steve Jobs, was irreplaceable. That shipping slightly better updated products (iPhone 5, 6, 7) would not bring the same explosive growth as the introduction of whole new product categories. That the so-called Apple TV (a TV!) might be a giant bomb, but that analysts had already built its success into their target price models. Note to the Appleholics: Apple has been trying to sell (unsuccessfully) a product called Apple TV since 2006.
I could go on, but I don't need to.
Hickey concludes that Apple will not get to the $1,000 target prices that some analysts now have on the stock for at least the next several years. He compares the current love affair with Apple shares with the bubble years. In particular, he notes that in early 2000, he pointed out in the letter that the best performing mutual funds of 1999 all had the same few tech stocks as their biggest positions: Sun Microsystems, Cisco Systems, Microsoft and, believe it or not, Nokia, which had soared 1,200% in a little over two years to a market cap close to $300 billion. Today, he notes, Nokia's valuation is $13 billion.
Warns Hickey: "Narrow markets, concentrated positions, frenzied stock action, IPO mania, cult stocks and disregard for valuations were the conditions preceding the 2000-2002 tech stock collapse, the 2008-2009 bear market and the 1973-1974 bear market, which ended the Nifty Fifty era. This is possibly another danger moment for tech investors."
