AAPL - Apple Inc.

[indirect]

I have a friend who made good money on 300 2012 leaps. Now he is concerned about his profits and health of Steve Jobs. If he sells it will be a short term gain. Can he do a offsetting transaction and clear both transaction in June for long term gain. Any suggestions from experienced traders welcome.

PS I agree with his assessment of Steve Jobs. If he has recurrence, he is highly unlikely be able to come back. I am considering some long term puts

[Bronco]

I am one of those people that thinks AAPL will produce tons of earnings/cash over the next year or so but I agree the long-term outlook just go murkier.  But I just bought a small amount of shares today to get back in.

What scares me more than Steve Jobs health is the clamoring for a dividend/buyback.  A buyback would be flat out stupid at this point.  Can't believe I am reading articles about this. 

I think the better long-term play is GOOG.  But I sold my shares and would wait for a pullback. 

I am not sure how many new devices Apple can produce now that their theme is out.  Integrated computers, phones, tablets and TV's.  How about integration with video?  There is no easy way to link my kid's videos into an Apple format that I know of (recorded on a Sony). 

It isn't too long ago I was taking the train to NY - trying to read content on my crappy PALM with service by sprint.  Technology does change fast. 



But integration and speed and extra features will the focus for the next 3 years IMO.  No big game changers. 

[given2invest]

I would love to hear why you think a buyback would be stupid.

1)  The balance sheet is grossly overcapitalized.  Do you disagree?  If you don't, then the only way to fix that is through a buyback, dividend, or acquisition. 

2)  You think the stock is undervalued, since you bought it.  Why, if undervalued, would you think it's stupid for the company to buyback stock at this level, given the overcapitalization?

[Bronco]

#1 - I bottom ticked and top ticked this MF'er.  Bought in pre-market and sold in after market same day and caught 18 points.

Am I am the man?  NO.  Just lucky on this one. 


A couple answers to your question.

1) THE BIG, HUGE, STARING YOU IN THE FACE difference between me buying apple and a buyback is my purchase is temporary and their purchase is permanent.  I can sell if/when things go bad.  If you took all the publicly traded companies over the last 50 - 60 years I wonder how many just grew and grew and how many went bust or decreased in value.  Will Apple be different than a $400B Cisco?  I don't know. 

2) Apple is not great value but you can say with certainty that they will produce a ton of cash over the next 1 year.  Tons.  Plus the $60B in the bank.  So maybe decent value and more safety than most stocks.

3)  If I was Apple and wanted to buy back stock, I would have done it at $90 and not $350.  Come on.

4)  Some of the best investors around keep a lot of cash.  The stock has been doing pretty well without your beloved buyback.  Compare that to companies that have bought back 10's of billions - GS, GE, MSFT.   Buybacks at good prices?  Return to shareholders?

[given2invest]

I'm not going to answer all your points, though I will say this:

I don't own Apple but it's currently trading at 11X 2011 earnings (ex cash) growing like crazy.  Some very smart value investors own the stock.  No value investors owned Cisco at 80x earnings in 2000.  This is not the same situation.  I can't tell you if Apple's earnings will be halved in 10 years, but this isn't the same situation.

Regarding buybacks, we'll just have to agree to disagree.  In all situations where:

1)  You believe a balance sheet is overcapitalized
2)  You own stock in the company and can sell at anytime (ie, not liquidity constrained or locked up)

You would be ok and actually prefer a buyback to a dividend or cash sitting on the balance sheet.  

You said "some of the best investors keep cash around".

1)  Apple is an investor?  No, it's a company.  It's not a holding company that is supposed to deploy capital into non core assets.  
2)  How much cash then?  There has to be a number.  No value investor wants his cash stuck at the corporate level forever, unless that company is a diversified holding company and their purpose is to invest in diversified companies.

[Bronco]

Agree to disagree.

But keep in mind we had huge buybacks in the 2000-2010 era and some call it the lost decade.

Bad timing by all these overcapitalized companies? 

I worked for a large Bermuda/Swiss conglomerate with steady cash flow and during the crisis they constantly had to sell their liquidity.  Cash on hand plus lines of credit...etc.

What is the correlation b/w the buybacks and the lost decade?  Any? 

Will buybacks work out well in the 2010 - 2020 era? 

I would be ok w/ a dividend but a 2% dividend would equate to $6B in a year.  Don't think Apple will do this.

I firmly believe that it is always better to work from a position of strength as opposed to weakness.  There are always critics to the companies that are always overcapitalized, but my guess is over the long-run these companies have MUCH better staying power. 

[given2invest]

Let me ask you this then:

Why shouldn't they do secondary offerings to raise more cash if they can never have enough?  (I promise I'm going somewhere with this question.)

[Bronco]

Obviously dilutive to shareholders, sends potenital bad signal to market, wouldn't make sense for a well capitalized company.  Of course, you will suggest that if it makes no sense to raise capital then it makes sense to do the opposite.

But neither you or I know there capital plans the next 5 years.  And in tech, you have no idea what their product cycles will look like (no one does).  Apple right now prefers to be conservative.  They don't make decisions quarter to quarter.  Similar strategy to Buffett by the way.

They could buy EMC tomorrow and have no cushion left.  Who knows what they will do?  But I am against the investment community / MBA program grain when it comes to this stuff.  I prefer to follow Buffett.

[given2invest]

No, what I will argue is that there should be a right number in regards to capitalization, though two people can differ on what that number is.  Having general rules like "companies should never do buybacks, especially if their stock has quadrupled" are just as bad as "companies should always buyback stock, regardless of capitalization/value". 

It's corporate finance 101.  This has nothing to do with Apple, by the way. 

[Bronco]

Tell Buffett about corporate finance 101.  I am sure he and Charlie would love to learn.  Love to be like everyone else.