|by Wes George
Only 135 Shopping Days Till Christmas & Other Apple Observations
August 14th, 2000
In my hometown of Austin, Texas, it's so hot this August that trees are dying. I mention this in hope of arousing some sympathy in you, my dear readers, in order to persevere through this week's Apple Trader column. I'm eager to clear my desktop of some observations that have been haunting me since MACWORLD.
135 Days till Christmas
Last August Apple's stock was trading in the $28 range (split adjusted) and moving into a steep uptrend that more than doubled the price per share by December. This is AAPL's time of year to shine with only 135 shopping days left until Christmas. It's hard to imagine how the same lust for technology stocks will pan out this year as it did last fall. Nevertheless, Apple's stock price is the best value in the PC sector.
Mutual fund managers know this and the percentage of technology funds investing in Apple has climbed to 26.8% in June from 17.9% at the beginning of this year. Apple's stock probably won't go below the low $40s even if the Nasdaq re-tests the lows for 2000. The is in part because of Apple's strong business and under valued stock price, but also because Apple last quarter bought a million shares in the $48 range, indicating the company has probably continued to buy back its stock in the mid-$40 range this quarter reinforcing support in this range. After all, this may be the last time Apple has a chance to stock up so cheaply for their employee stock option plans. Next year at this time no one will be surprised if AAPL's price has doubled.
Senescent Tech Stocks
From a chartist point of view, the Nasdaq is one ill monkey. If you draw a trend line for the Nasdaq starting back in the week of October 9th, 1998, through the low point during the weeks of October 26th, 1999 and May 26th, 2000, you'll see that this trendline is at about 3550 today. Any break below this support zone almost certainly means a trip back down to test the lows for 2000. An extension of this trendline places it at about 3800 by October, so if the Nasdaq is going to avoid a technical meltdown, a serious rally needs to begin before then.
The rally scenario, however, seems unlikely for many reasons. The first reason stems from more chartist voodoo: the Nasdaq recently tried and failed to burst above 3927 the index's 200-day moving average. This is often a sign that the 200-day moving average has become resistance and marks the high zone of the Nasdaq's trading range. As the 200-day moving average and the Nasdaq's 24-month trendline converge, it's reasonable to assume that something's got to give.
Ironically, given the sentiment on Wall Street, it's hard to imagine how current events could become more favorable. Earnings on the Nasdaq are at record highs, so with a slowing economy there is only one direction for earnings to go. Moreover, most tech stocks are priced for perfection and investors have taken a cynical view of this quarter's earnings announcements. We witnessed this in the decline of every major tech stock that announced great earnings this quarter investors always found some detail to sell on.
In fact, investors seem to have lost their taste for the technology hype game. Companies like Cisco have never failed to beat earnings estimates. Apple Computer has 'surprised' Wall Street every quarter since 1997. Technology firms have mastered the art of underestimating future profits in an unspoken conspiracy with their analysts, who allow them to beat estimates (barring a real catastrophe) whenever they report.
It's an almost unconscious and inevitable conspiracy. Perhaps it's the sign of a fully matured, end game bull market. After all, chief financial officers get fired-- and companies are sued by their shareholders-- when they get too optimistic about future growth and profits. A good CFO is just doing his job when he knowingly cabals with the company's analysts to drive the earnings consensus lower than reality merits. Investors respond by raising their earnings standards ever higher, till even missing the whisper number means a stock takes a big hit.
It's a similar ploy to the now-extinct 'sell' recommendation by brokerage houses. Investors have learned to read analysts' reports like Russians read the Pravda-- between the lines. A downgrade from strong buy to buy means, "we are reducing our position in XYZ and would like you to buy the shares we'll be selling." A downgrade to hold from buy means, "we have sold our position in XYZ, but don't want to offend management." Sometimes an upgrade to strong buy or buy for a stock that has already made a 50 to 100% move in recent months cynically means, "we are selling at the top and need some strong buying demand to cover our tracks."
This is the most psychological stock market I've ever witnessed. Investors seem to suffer from paramnesia. They sell on good earnings, cheer a slowing economy, rally on worker layoffs, cower at Alan Greenspan's every word, and madly rotate sectors at an ever quickening pace. The analysts are totally confused, and in their obsession for details they've lost sight of the big picture, which ironically is the same as it ever was.
Of course, with the establishment of the Mac Observer Virtual Stock Portfolio, I've become my own contrarian indicator. The MOVSP is about 50% in a cash position. I'm waiting for a successful retest of May's Nasdaq lows before wading in any deeper. In my personal portfolio I've been dabbling in the old-economy financial, energy and utility stocks for the first time since the early 1990s.
Mac Inventory Problems?
Tim Cook, Apple's VP of Operations, gave a terrific exposition at MACWORLD to a room full of analysts about the extremely efficient way Apple is handling their inventories. It was so impressive I wrote an article called Apple's Business Operations: It's a Beautiful Thing.
Mr. Cook said that by last quarter the company was shipping 75% of standard orders at the online Apple Store the same day or next, and is targeting nothing less than 100% worldwide shipped the same or next day.
Custom configured orders obviously take more time to fill, but Mr. Cook claimed Apple's increase in efficiency here has paralleled that of the standard orders. Apple now ships 75% of custom-built computers in 10 days or less. Mr. Cook's goal is to reduce that to 2 days.
Since MacWorld NYC, however, web-wide anecdotal evidence indicates that Apple Store customers are experiencing delays significantly beyond Apple's estimated shipping times for a number of the company's new products.
The problems with Apple's inventory are probably related to the ambitious, simultaneous refreshing of 75% of Apple's product lines. Demand for newly announced Mac models typically swamps channels at first. In the past Apple has had difficulties in introducing just one new product, it's not too surprising that a dozen or so new SKUs at once are straining the system.
The real disconnect appears to be between what Apple can achieve in its warehouses and factories and what the Apple Store tells the customer. Simply stating up front realistic estimates for shipping dates, even if outside Tim Cook's target numbers, is preferable to misleading, disappointing and confusing the Apple Store customers. If Apple intends to measure inventory by the hour, it needs to measure consumer satisfaction (or dissatisfaction) using the same gauge.
Steve Jobs on TV
Mr. Jobs appeared on CNBC last week for a short interview by Maria Bartiromo about Pixar's earnings announcement. Now, maybe it's just me, but does Steve Jobs look really uncomfortable when he talks about his business ventures on TV? Why is such a spellbinding performer during MACWORLD's keynote address so awkward as a talking head? Lord knows he's not shy.
Here's a clue: Maria asked Steve a typically bone-headed Wall Street type question: How does Mr. Jobs plan to keep Apple's stock price trending higher? You could see the irritation creeping into Steve's face. He calmly explained to Maria that at neither Pixar or Apple does the management concern itself with the stock price. The stock price, Mr. Jobs declared, will take care of itself as long as Apple and Pixar continue to produce the world's best computers and animation, respectively. Mr. Jobs obviously disdains the market capitalization games so beloved by many corporate managers. It must be Apple's brilliant CFO, Fred Anderson, who cleverly arranges for the company to consistently beat the analyst's earnings estimates every quarter since 1997.
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Wes George writes about the financial side of being a Mac nut. Wes has followed Apple's finances for the last 7 years and comes to The Mac Observer every Monday to tell all about his opinions. He is, in his own words, "inordinately fond of money." If you would like to write Wes, make it nice. Someday you might own a company that has something to do with Apple, and Wes will probably still be writing for The Mac Observer...... On the other hand, Mr. George is known to love a rousing, hair-raising debate, so send him your worst!
Disclaimer: This column is for informational and entertainment purposes. While Mr. George may be sage indeed, his writings can not be construed as a solicitation to buy, nor an offering to sell any particular stock. As with any trading in the financial markets, you must use your own judgment to make the best trades that you can. Neither The Mac Observer nor Wes George may be held accountable for trading advice.