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mercredi 4 avril 2012

SOMETHING ON AAPL :Apple: Know when to hold 'em, know when to fold 'em..

Aswath Damodaran
Apple: Know when to hold 'em, know when to fold 'em..

In my last post on Apple, I made two confessions. The first was that I have loved the company’s products for almost three decades and am thus incapable of being unbiased in assessing value or marking judgments on its quality as a business. The other was that I am an Apple stockholder of long standing. At least one of these statements is no longer true, since I did sell my holdings of Apple in the last week. Since the issue of whether Apple is going to $1000/share or to $ 200/share still seems to actively debated, I wanted to explain why I chose to fold, rather than hold.

Before I list my reasons for selling, it is important that I list the justifications that I will not offer:
  1. I don’t consider Apple to be over valued: I did not sell Apple because I consider it an overvalued stock. In fact, the discounted cash flow valuation that I had my last post, where Ivalued Apple at $710/share still holds. The only difference is that Apple, which was under valued by about 23% when I looked at it a few weeks ago (at $545/share) looks a little less under valued today (about 13% at $620/share). 
  2. I don't buy the signaling stories: In the weeks since my post, Apple did decide to return a modest portion of their mammoth cash balance to stockholders, partly in a stock buyback of $10 billion and partly in the form of a regular dividend of about $10/share (which works out to a dividend of about $ 10 billion at least for this year). There are some long time Apple watchers who have viewed these actions as signals that the company no longer has the investment opportunities that it did and thus as a negative. I don’t buy this signaling story. The rate at which cash has been accumulating in Apple is evidence aplenty that they don’t have enough investment opportunities to invest this cash in. Thus, their decision to return some of that cash reinforces what is already obvious. 
So, why did I choose to sell Apple? It is because my fellow-stockholders in the company are making me a little nervous. As I look at Apple's current stockholders, here is what I see:
  1. Apple has become a momentum play: Much as I would like to believe that everyone who has been jumping on the Apple bandwagon in the last year is investing for the right reason, i.e.. because they see good value in the stock, Apple has become the ultimate momentum play. In effect, the biggest reason Apple’s stock price is going up now is because it has gone up in the recent past, not because of any news stories or information coming about about the company. Don’t get me wrong. Momentum is a powerful force in markets and I had a post on the power of momentum investing strategies. As an intrinsic value investor, though, it is not only not my cup of tea but it also delinks price from intrinsic value; put differently, I don't have a competitive edge in the momentum game. 
  2. Institutional favorite: Apple is now an institutional favorite, taking center place in almost every large institutional investor’s portfolio. Note that this is related to the first point, since institutional investors are creatures of momentum, buying stocks that have gone up and dumping stocks that have dropped. So, what is my problem with this? First, institutional investors are a fickle crowd, who can quickly turn on stocks that they love.... Second, as a contrarian, my instinct tells me that if institutional investors collectively think that a stock is good, it is time for me to reassess. 
  3. Mixed Dividend Clientele: Apple was a momentum stock and an institutional favorite the last time I posted as well.  For me, the tipping point was Apple’s decision to institute a dividend. Can they afford it? Of course, but I think it was a tactical error at two levels. First, it represents a break from its recent and mostly successful past. For  the last 15 years, Apple has been held by stockholders who were comfortable with its policy of no dividends and high quality growth, and were willing to claim their rewards in price appreciation. By paying a dividend, Apple has opened it doors to a “dividend seeking” clientele, who not only want to see dividends paid out but want to see growth in these dividends. In fact, many of the investors who are new to Apple stock in the last few months are from this group. The clash between what the “old price appreciation” stockholders in Apple think is best and what the “new dividend” stockholders is not significant at the moment, but it will rise to the surface when things don’t go well. We are a bad earnings report or a botched new product away from a full fledged battle between these groups, with Apple's managers in the middle. Second, in my earlier post, I noted  that it would be in Apple’s best interests to put this cash issue behind them decisively by announcing a shockingly large buyback and getting back to business. In many ways, what Apple has done (in announcing a small stock buyback and a dividend) will ensure that the cash question will be a major distraction for the long term. 
Put in blunt terms, I am selling my Apple stock because I am worried about my fellow travelers in the stock. It is not that I have a problem with any of these groups individually, since I invest in other stocks where I co-exist with momentum investors, institutional investors, growth seeking investors or dividend seeking investors. In Apple, though, they are all in the mix, with different and contradictory views about what makes the company a good investment and what it should do, as a company, going forward. Each group is expecting its best case outcome: continuing price increases for the momentum group and institutional investors, high growth and a stream of new products for the price appreciation crowd and growing dividends for the dividend seekers. Perhaps, Apple can be all things to all these investors, but that is asking for a lot, and perhaps the impossible.

I bought my Apple shares in April 1997 and I have the price appreciation (and a potential tax bill) to show for it. It has been a wonderful ride, but as the old country song would put it, I have to know"when to hold 'em, know when to fold 'em”, and my gut (strange thing for an intrinsic value guy to admit to..) tells me that it is time for me to move on. Could I regret this decision? I hope I do. Nothing would make me happier than see the stock goes to new heights and have Apple become the first trillion-dollar market cap company. I love the company and its products far more than I care about any bruising my ego and pocketbook may take.

Courtesy of Musing on Masrkets
Courtesy of Asweath Damodaran
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