Why Apple Investors Should Worry

By Bert Dohmen

The big revelation in the financial media is that “Apple stock is in a correction.” Well, it’s a little late for that. The handwriting was on the wall for the past five months. The stock is now back to where it was last January. This means anyone who bought since that time holds the stock at a loss. Those are potential sellers, should the price get back to the $122 area.

Speaking as a technical analyst, I conclude that the chart of Apple stock now has an important top. The long sideway trading pattern for the last six months has established a proverbial “brick wall’ on any rally attempt.

It gets worse: Apple is the benchmark for  some of the popular stock indices. Because it is the highest capitalization stock in the indices, it carries the greatest weight. Therefore, when the stock can no longer be supported because of big selling pressure, it is bearish for the stock market as a whole.

The chart shows the long sideways pattern since February 2015. That support has now been broken. The clue was the big gap down on July 22 on heavy volume. That showed an urgency to get out. There are a number of large hedge funds that had big positions in Apple, one or several of which probably sold shares lately.

The chart of a stock is usually far ahead of the news stories. It shows what the well-connected investment outfits are doing. It tells you “money flow,” in or out of an investment. I use a measure of changes in money flow to judge what the big, smart money is doing. As I have been warning for the past five months, the big money is flowing out. Several well-known hedge funds had big positions in Apple. They could be the big sellers.

Why would this be? After all, there are still millions of people who love Apple products.

However, smart investors always differentiate between a company’s products and the stock. Buying a phone is different from buying the stock. Successful investors look not at ‘what is,’ but the change of ‘what is.’

Let’s look at the facts:

The iPod at one time was ahead of the competition in design. People loved it. But Apple didn’t adjust the price. It is now so vastly overpriced that no one even talks about it. One review on www.appleinsider.comsays: “Apple’s insistence on a $149 price tag (Nano) is almost offensive.”

IPads are also uncompetitive in price, and sales are down more than 34%. Top management has the attitude that Apple does not have to cut prices. There is no innovation in spite of a multitude of requests for additional features. However, Apple is tone deaf.

The iPhone is the one item that still has the big sales and the big profit margins. But one product, a mobile phone, does not justify making Apple the most highly valued company in the world, especially when that one product faces so much new competition.

The spike in the stock’s price, produced by the catchup of the large screen iPhone, will now wear off and the competition with lower prices will encroach on what was a virtual monopoly in that market just a few years ago.

High profit margins always attract a lot of competition until the profits shrink. Shrinking profit margins make for shrinking stock prices. And that’s what should be important for investors.

The stock crash in China also produces an unknown about future China demand for the very expensive iPhone.

The biggest positive factor for Apple stock since mid-2013 has been stock buybacks. The company has used $130 billion to buy back it’s own stock and give shareholders dividends.

It wasn’t all earnings that were used. About $55 billion in debt was taken on to do these buybacks. But has that created any shareholder value? Instead of financial engineering to boost the stock, that $130 billion could have been used in better ways to produce long-term value via acquisitions of some creative companies.

In general, I expect stock buybacks in the market to be reduced or suspended in the next 12 months as stock prices decline and companies don’t want to look stupid buying shares in a down market. Exxon has already suspended its buybacks “to conserve cash.”

Apple made one highly publicized acquisition, Beats, a maker of headphones, for about $2 billion. Many analysts, including yours truly, were mystified by the purchase and the high price. Aren’t there better, more worthwhile acquisition candidates?

Creativity is what Apple lacks since Steve Jobs left. Here are problems I see:

·         The only accomplishment the past years was a phone with a larger screen, something the competition had three years earlier. The camera is still inferior.

·         The Apple Watch is a flop. (See my artcile from April 14, “Will the Apple Watch Flop?”). One technology commentator said on national TV that the watch would never have been released under Steve Jobs. It needs big improvement.

·         iPad sales are down 34%. Market share is about 25% of global tablet sales vs. 65% in 2011. That’s a horrendous decline.

·         The streaming music, with the antiquated iTunes software, will not make any significant money.

·         Apple Pay is not expected to contribute to profits for a long time.  The competition for digital payments is alive and well.

·         So now it is back to the “Apple TV.” When the actual television console didn’t materialize after years of stories about an imaginary “Apple TV,” Apple produced a small square that works like Roku and called it “Apple TV.” But now supposedly there is a real television in the planning. Don’t hold your breath.

·         Then there is the “Apple Car.” Imagine producing a car when the CEO said two years ago that a larger screen iPhone was not easy. My prediction: the car will never see the light of day.

·         The huge, oversized “flying saucer-shaped” new headquarters building is the major signal of an Apple top. It’s the typical ‘edifice-complex’ when a company has too much cash and too few ideas what to do with the cash. I predict that eventually, much of the space will be leased out to other firms.

·         Finally, from here on, earnings gains will be negative. Sales in the fourth quarter will show negative growth from the prior year. Put that on your calendar.

Judging by the facts above, the probability is high that the “glory days” for the firm have come to an end. I am not talking about the end of Apple.

For all the reasons I have written the past months, Apple is now facing what I call the ‘Sonyfication.’ If you are old enough you will remember when Sony was the unquestioned leader in home electronics, TVs, VCRs and other products. This enabled it to charge much higher prices while offering fewer features than the competition. They got away with it for several years until consumers found alternatives.

When the Betamax-VCR was discontinued, although its technology was superior to VHS, it was the market’s verdict that “open” systems win out over a closed system.

Now Sony is just another product name. It’s stock price now is $27 vs. $157 in the year 2000. Could this happen to Apple? Is the iPad sales plunge a similar sign that the consumer is going to tablets with an “open” system? The last quarter of 2015 will see a decline in Apple profits.

Don’t shoot the messenger. Think about the above and evaluate without getting emotional. My rule is that it’s ok to fall in love with a product, but never with a stock.