Apple has had a great run
If I had all the answers to which way and why for Apple, I would sleep easier. Then I'd get myself one of those $40 million spreads on the lake in Palm Beach and live happily ever after. I’d don a blue blazer to throw out my garbage.
My Apple problem is I bought in when it introduced its iPod and promptly demolished Sony’s Walkman which had a worldwide footprint of 500 million users. Apple sold in the thirties back in 2005, so it’s gone around the clock umpteen times. Whuz you there, Charlie?
My taxes already have built multiple missile silos in North Dakota. Either I give away to my foundation all stocks with huge gains or I write covered options on them month after month. With Apple, I took the covered calls route, but the stock gapped down so fast that I couldn’t keep up with its swoon.
I can’t spend my day totally focused on one property. But, I’m sure Apple fits the mold of a growth stock long in the tooth. No disaster like Nokia, Motorola and Research in Motion but nevertheless destined to sell at 10 times flattish earnings, just another electronics hardware operator. Its apps going nowhere. I’ve penciled in $40 a share in earnings power next year. Analysts are at $57.50.
And, yet, there is the dream. Apple builds up its Internet content business, aside from the music franchise. So far, Amazon and eBay are winners. Microsoft is falling flat, its investment in Barnes & Noble’s Nook electronic reader looking more ‘n’ more like a Hail Mary pass in the air.
Apple ain’t a buy. Just a weak hold for now. If you find something better, bang it out. Be mindful the analyst fraternity construed Apple as an $850 piece of paper just months ago. Some guys were at $1,000. Nobody saw Apple at a $500 price point. Many stick to their $850 valuation.
If Apple loses share of market in smartphones and tablets I put it at $400. The good news is I can’t rationalize anything below $400. Apple’s ill-executed map app was a leading indicator that Steve Jobs truly was gone, forever, coming back only as a Hollywood production. I’m underweighted in Apple and ready to write next month’s call options.
Writing call options, covered and uncovered, is a humbling experience because you can be right longer term but lose your shirt short term, particularly if you write one month options – my game. Your rhythm must be as exquisite as a prima ballerina. A bad stock can rally just before the naked calls you wrote are set to expire and you drop a multiple of what you received for writing the option.
This has KO’d me so many times that I have learned to loathe the third Friday in each month, expiration date time. What I do is jump in and write options on the succeeding month, sometimes a multiple of what I previously wrote. The market owes me, I say, sub silentio. Sell options into the rally. Go against the grain, baby!
You do all this not only to sharpen trading skills, but to protect short term profits until they anniversary your holding period. I admire Warren Buffett’s tenacity to marry forever a stock pick that he believes in. Yet, an objective analysis of growth stock longevity suggests just a handful reign for more than a decade.
My time span is shorter – three to five years and I have few regrets. Apple fits this schema. Even the big bulls who still hold to an $850 price goal believe Apple’s growth rate within 2 years will revert to 10 percent or less. Competition is getting better and market saturation is no longer a distant dot on the horizon.
My gut says Apple runs out of gas in less than 2 years. Hence, my appetite is undiminished for writing covered calls, month after month. I view any intro of a lower priced iPhone as a sign of weakness, the only way to maintain near primacy in the China market, but it must reduce gross margins. Apple’s run as a great growth property is beyond 5 years, approaching a decade’s worth by 2015. The 10-year rule applies herein.
During the early sixties after Boeing ramped up its 707 jet, airlines turned into growth stocks. Money brokers then financed my converts on 10 percent margin. I cashed in Eastern Airlines paper at $400, and Boeing, United Aircraft and United Airlines convertibles all hit double par for me. I had enough capital to start my own money management firm and haven’t looked back.
Addicted to leverage, I turned to the stock options market. In the early seventies a coterie of market makers operated with minimal capital, many graduated from OTC trading desks. They understood and calculated volatility, perhaps not so precisely as the Black-Scholes model that later garnered a Nobel Prize in economics, but good enough to get by and not misprice quotes on the puts and calls they made markets in.
Shorting growth stocks during the 1973 – ’74 recession was as rewarding as shorting NASDAQ at the top early in 2000 when this index peaked at 5,000. NASDAQ bottomed in the spring of 2003 close to 1,000 thereby creating a giant 5-year sombrero formation. I sold options on Polaroid until it hit the dust, at which point analysts sheepishly wrote it was unanalyzable. But, Apple is not a Polaroid sombrero candidate. By yearend Apple’s cash boodle approaches $150 a share, albeit mainly abroad.
Meanwhile, Amazon makes new highs and nobody can model Amazon with any hope of exactitude. Amazon goes on terrorizing the likes of Best Buy and Barnes & Noble, anyone with a bricks and mortar construct. Jeff Bezos is building new profit centers like Internet fulfillment services for outsiders. I see more ‘n’ more consumers buying a bigger percentage of their worldly goods on the Internet. Watch Amazon’s top line. Just so long as it compounds at 25 percent, the stock is golden, the perfect gut play in a market starved for fresh growth faces.
I wasn’t smart enough to short NASDAQ at its peak in 2000. The late Leon Levy, a great operator and old friend, shorted NASDAQ and went long the euro, one of the few simple but great spread trades that rode the peak of the NASDAQ sombrero down to its right side wide brim in 2001 – ’02.
I’m still addicted to leveraging single B bonds, my debit balance pegged at 70 basis points. If you have to think about a great concept for more than 15 minutes, it’s not a good idea. Drop it.
For Apple to trace a genuine sombrero formation on its 10-year chart it would touch down at a hundred bucks.
Martin T. Sosnoff is chairman and founder of Atalanta Sosnoff Capital, LLC, an investment management company with $6 billion in assets under management. Sosnoff has published two books about his experiences on Wall Street, Humble on Wall Street and Silent Investor, Silent Loser. He was a columnist for many years at Forbes Magazine and for three years at The New York Post. Sosnoff owns personally and / or Atalanta Sosnoff Capital owns for clients the following investments cited in this commentary: Apple, Amazon, eBay and Boeing.
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