Apple, Event Risk, and Market Timing

Owning any stock involves risk.  Sometimes it is the risk of specific events.  Apple Computer, Inc.  (AAPL) is a good example.

The loss of Steve Jobs as CEO is obviously a negative for the stock.  He has been a visionary leader, and that has been recognized by the market.

Precisely what does his loss mean, and how should investors react?


I have been very accurate about Apple, a big, multi-year winner for me.  I have written about it fairly often, most recently in July when I explained why people would probably miss big gains if they tried to trade around the 200-day moving average, then about 335.  I have about twenty other articles, mostly illustrating why it is better to own this stock on valuation rather than try to time the market.  Here is one from 2006, when the stock was trading about 60.

Apple is a good illustration of why earnings-based fundamental analysis pays off in the long run.  That is why I have written about it so often.

Two Perspectives

There are two different ways to think about Apple — the story and the data.

The Story

Many people focus on the drama, the product introductions and the human story.  This happens for many reasons, but here are the most important:

  • You can write many articles about products, reviews, and innovations.
  • Everyone is a (self-described) expert on these topics, so all can join in.
  • The stock is volatile, providing a lot of opportunity to draw charts and offer technical opinions.
  • The ever-present threat of losing Steve Jobs was itself a source of rumors and trading opportunities.

The Data

You could also focus on the data, the greatest growth story of our time.  Most people did not know how to analyze the stock correctly.  Here are three incorrect methods, all frequently cited by many pundits:

  • Take a PE ratio without adjusting for the cash on the books.
  • Do some Shiller-style ten-year, backward-looking method — guaranteed to make the company look expensive until it is too late to buy.
  • Try to apply Tobin's Q.  What do you suppose is the "replacement value" for Apple?

The Conclusion for Apple

Regular readers know that I endorse data over the "story,"  but let's try to pay attention to both.  Investors should have expected this.  I did my own research a year ago, verifying that the new product stream was not dependent upon Jobs.  As an investor, I knew that there would someday be bad news, but it was something to be expected.  There was no way to time this.  If you worried about the eventual bad news, you would have missed (at least) the last 100 points in the stock. 

The illustration of the differing perspectives comes from a timely and helpful discussion on CNBC.

From James Altucher we have the data.  "The stock trades for 12 times forward earnings, has 80 billion in cash, and 100% earnings growth.  Meanwhile, the platform is all there.  They are going to continue to sell iPads.  They are going to continue to sell iPhones…"

From Jon Fortt we have a good take on the story.  He does a very nice job of describing the special qualities of Jobs — in negotiating costs, making new deals, and getting the most from his team.  While he is important for innovation, that is not the whole story.  Fortt also notes that Tim Cook has some of these same qualities.

While there will be many stories tomorrow morning, this video captures the key elements to consider.



Investment and Market Implications

If you have been waiting for an entry point in Apple, you now have it.  There will also be market implications since AAPL is the largest stock in the S&P and the QQQ's.

The issue of "headline risk" is one that we must deal with every day.

Reading the headlines is guaranteed to send you to the sidelines.  Does that fit with your future?

 [long AAPL]

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  • Jeff August 24, 2011  

    I’ve noticed that James Altucher often plays fast and loose with facts. Any idea how he gets $80 Billion in cash? On latest Balance Sheet, Apple’s total Cash and Short-Term Investments was $28.395 Billion.

  • oldprof August 24, 2011  

    Jeff — I tried to take a direct quote from the video, so it is a number of James.
    While he has many very colorful and emphatic articles, I do not find him to be “fast and loose” with facts or I would not cite him.
    As you know, there are various ratios used in securities analysis, with dividing lines for cash and instruments of various maturities. I think that the number cited includes low risk securities that might have a maturity of more than one year. Many others also summarize in this form.
    Put another way, Apple could liquidate their portfolio tomorrow for that amount. I don’t think it detracts from the argument, but I understand your question.

  • Brenda Tighe August 25, 2011  

    Interesting article, Jeff. My team was discussing Jobs’departure from Apple today. One of my teammates said he fully expects the stock to tank. I’m assuming that this is why you say that we now have an entry point if we want to get in?

  • rs August 25, 2011  

    Thanks for another dash of insight Jeff.
    I felt sad when I read SJ’s resignation letter. It’s a reminder that our time is indeed so short.
    It’s interesting to see Apple’s product/brand positioning philosophy extend to its policy on stock splits. I wonder if it might change eventually.

  • heywally August 25, 2011  

    Though it clearly is a great buy and hold stock/option, it is also a heck of a ‘buy the dip’ one too. Thanks ….