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The Case Against Apple


Utilizing both fundamental and technical analysis, I see potential for some bad apples.

Can You See It Coming?

Again, let history be a guide but, as the mutual-fund prospectus always cautions, past performance doesn't guarantee future results. For this aspect of my discussion, I developed another way to highlight divergences between price and volume, but substituted an altered price-to-volume quantity employing a square-root function in the place of the dollar volume (simple monomials be gone!).

To avoid an audience-lethargy problem, I'm not going to go into exhaustive detail about all the calculations involved in this exercise, but I will share the game plan. And essentially that plan was to figure out a threshold criterion for isolating and observing 21 price-to-volume spikes to stand alongside the 21 bad apples above.

The results were striking. As expected (or at least it didn't surprise me), I was able to identify two such spikes in 1991 and 1992 that could be alleged to have "presaged" the grim years for Apple's stock in the 1990s. Much more unexpected and surprising, however, is that the other 19 spikes have all occurred during this year and 2009, notwithstanding the big correction last year followed by the big run-up since. My preliminary conclusion from these findings is that the stock should remain strong over the short term, with significant flattening two to three quarters or more out. Longer term than that, I'm far less sanguine, meaning such flattening could be prolonged.

Returning to Fundamentals

Here are my concluding thoughts about Apple at this time. While one thing Apple shares with most other stocks since late winter last year is that it has been going up -- smartly -- what it doesn't share may be much more worrisome, and may also account for the "all-in" lackluster volume. Apple is in a class by itself, and that may sound good, and in many ways it is. But there's a bad side too. Most stocks have been climbing a wall of worry about a shaky economy suffering a deep recession and high unemployment. Apple hasn't been doing that. No wall of worry at Apple. There's too much love for that.

Yet it's going up anyway. Along with 19 price-to-volume aberrations of the not-so-wonderful kind this year and last, including relatively low-price periods that should have kept those spikes at bay, and that also look a lot like the two in the early 1990s followed by "the dark years." So if you say storm clouds can't gather over this stock, the fact is they can because it's happened before. That in no way means that the next 26 years can't look as delicious as the performance since 1984 either -- just that it may also come with some long stretches of potholes.

Too Much Cash?

Another fundamental issue that gnaws at me about Apple is its cash problem, and Apple's cash problem is both enormous and rather unusual, and not just because it has so much cash. What makes Apple's cash problem unusual isn't only the amount of the cash but where that cash is (in a lot of international jurisdictions subject to high marginal tax rates if it's drawn out), and the fact that everything amazing Apple does is organically developed (not acquired, the usual way to spend large sums of cash). On top of that, if Apple declares a dividend, it's a whole new ballgame for the stock, and probably not a positive one relative to the past.

But Apple may be backing into a solution (or maybe it's doing it deliberately; we shall see). Have you noticed the new pricing policy on the iPad? Apple will remain a partner with AT&T (T) for its data plans, offering 250MB of data for $14.99 per month, and an unlimited plan for $30 -- both without an annual contract. This reminds me a lot of when the courts granted universal access to the AT&T copper landline network back in the 1970s. The brass at MCI then joked, worriedly, "they've (AT&T) got us by the calls." Yet AT&T didn't cut pricing as aggressively as its scale could have allowed it to, which might have knocked the new competitors into the grave at the outset. Perhaps they were too worried about more legal trouble? Or maybe too occupied with the divestiture of the Baby Bells? We'll never know for certain, but what Apple is doing now with the pricing may be what AT&T didn't do in the 1970s. Could that be an effort to solve not only the cash problem, but to get a huge double-whammy in market share too? Not only will we find that out in time to come, I suspect we'll also see some substantial evidence of why fundamentalists and technicians usually travel the same ground as they reach similar conclusions about the stock while arriving at those conclusions by seemingly different yet not-so-different routes.

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No positions in stocks mentioned.

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