$AAPL is acting irrationally compared to almost all other equities

I listened to Fast Money yesterday and there was yet another talking head, whose primary expert qualification was that she called the Enron debacle (BACK IN 2000!). She was implying, without out-right saying, that the target price should be $200 based on her analysis. Her main premise is that transitions from a ‘growth tech stock’ to a value tech stock’ is a messy affair. To the credit of Karen Finerman, she buttoned up the conversation by saying that AAPL has never been valued as a growth stock. Finerman is correct, of course, and a valuation now that is bordering on single digits is certainly not a growth stock valuation. Nevermind that the PEG ratio is closing in on 0.5.

Here’s my rant on this stock: depending on whether or not AAPL is rising or falling analysts and talking heads will proffer the argument that AAPL is either just like other companies or that AAPL is special and different than other companies. That’s ok, but the bottom line is that it can’t be both! This is a binary type of distinction, like being pregnant or not.

Either way, no matter what your answer is,  the stock price is behaving irrationally. Lets take one side and say that AAPL is just like other companies. Lets compare it to two older tech stocks, MSFT and CSCO. I’ve chosen these two as AAPL is actually a blend of the two. CSCO primarily makes hardware that changes substantially with time (why I chose CSCO over INTC whose product is fast becoming a commodity) and MSFT primarly makes software with a few exceptions. Now let’s compare the P/E ratio using 12 month trailing earnings and PEG ratio using 5 year projections. Right now for P/E AAPL is trading at 10.37, CSCO at 13.67 and MSFT at 14.94. Their PEG ratios (which compares valuation to growth rate) are as follows: AAPL 0.75, CSCO 1.63, MSFT 1.83. Here’s the irrationality in this scenario – the PEG ratios are assuming that AAPL will not grow at all, anymore. In fact it assumes that it will contract, much like RIMM. But lets say that AAPL is like these old tech stalwarts and should trade with a similar P/E. Then if valued like CSCO, AAPL should be trading at 601.48, and if trading like MSFT then we should be seeing a share price of 657.36. But today, AAPL is trading at 456 instead.

What’s the other side of the argument? That AAPL is special, that its not like other companies, it is innovative and forward thinking, like say NFLX? Here the market is even more irrational. NFLX is trading at a PE of 636 and has a PEG of 33.91! Want to see what the company would be worth at this type of valuation? $27,984 a share! Yes, one share!

Well the answer to the question is obvious, the market is irrational. Therefore trading is a little like trying to predict what a crazy-assed schizophrenic will do at any given situation. I think I already knew that, but until you look at the numbers you don’t realize just how crazy it can be . . .

Is today the day that $AAPL starts the climb out of the pit?

I sleep pretty well and rarely worry about the performance of our portfolio. But I have had about 2-3 nights over the last month where I woke up early worrying about my AAPL position. This morning was one of those mornings. I don’t know why but maybe it was because the price action yesterday was so disappointing. The stock made it to about 455 or so but ended closing down around 442. When it hit the 440’s I sold a couple of bull credit put spreads that expires next week, the 440/425. Mind you I am long an April 440/425 bear put spread as a hedge, but it was still disconcerting to see the stock trade so poorly. I woke up this morning convinced that this was the start of the march down to 420 before going on down to the 300s.

The stock opened around 445 and then went back down to 442, but since then has started a 45 degree climb, slow but steady and as I write this it is trading about 459, up 16.8 or about 3.8%. I am long both the stock and spreads but have been reluctant to sell upside calls thinking that there would come a day that valuation would matter. Maybe today is that day.

Also today:

AMZN – bought a March 250 call to protect the Feb 265 and Mar 280 calls that I am short. Still own an Apr 275/255 put spread to hedge this long. I still don’t trust this stock and think when the market pull back occurs. It takes AMZN down farther than most.


GOOG – bought a calendar spread, BTO Mar16 750 call and STO a Feb22 780 call

IBM – added a calendar spread BTO April 180 call and STO Feb16 205 call

TBT – added to long positions both underlying and; BTO Mar 68 call STO Mar 72 calls