Bobbing for another Apple?
Don't get overly caught up in its earnings report. This tech giant is still your best bet for making money in 2013.
Apple (AAPL) has demonstrated amazing predictability based on the chart pattern lately.
At a certain point, investors lose their desire to accept the current price and dig their heels in. A common name for this unwillingness to sell is "strong hands" -- and that's where Apple is right now. The bulk of investors are not willing to sell because they don't have a better place to put their money.
The most common question I'm receiving now concerns Apple's upcoming earnings release. I understand the enthusiasm (some may call it worry), but I caution long-term investors not to get too caught up over one quarter. It's not healthy from a mental or financial point of view.
Shrinking margins have become the Wicked Witch of the West, and lower purchase orders by Apple appear to be a Wicked Witch of the East. (Was there a Wicked Witch of the East? I don't know, but you get the point). Both of these issues may help sell newspapers and help some in the media look smart, but you will overvalue both of the metrics at your own financial peril. Here's why.
Apple's margins are massive by any standard. After adjusting for the largest reasonable cuts to gross and net margins, Apple still maintains a lead in margins that competitors Nokia (NOK), Research In Motion (RIMM), Microsoft (MSFT), and Sirius XM Radio (SIRI) would love to enjoy. (Microsoft owns and publishes Top Stocks, an MSN Money site.)
My estimated forward looking operating margins:
Apple: Minimum of 30% to 33%, but I believe 33 to 36% is more likely.
Nokia: 1% to 2% estimated best case, although they may not have any.
RIM: 3% to 6% estimated best case, but 0%-3% is more likely.
MSFT: 28% to 32%
Sirius: 25% to 26%
Net margins largely follow the same pattern on a relative basis. Dollar for dollar invested, investors can expect a greater return on investment with Apple than most any other technology company. The price-to-earnings ratio is pricing in zero growth. No one is reasonably suggesting that Apple will not at least have the second-best quarter ever if they don't report the best in both revenue and earnings.
Only the very bottom estimates for 2014 (the next fiscal year) suggest 2014 will not turn into a record year for revenue. Yet, as clear as crystal, emotion has taken hold of the weaker hands, and the stock is trading with single-digit P/Es. Intel didn't delight Wall Street with its last earnings report and continues to trade at a higher valuation.
Don't get me wrong, I am bullish on Intel, but it's a good example to use since the chipmaker reported a few days ago. RIM and Nokia may move around as the headlines pump and dump the stocks, but in the end, both have massive headwind in trying to gain a real foothold of market share currently occupied by Google's (GOOG) Android and iPhones.
I have written this before, but maybe I need to scream it at the top of my lungs: Changes in parts ordered are not going to change the fact that the iPhone 5 sold better during its opening weekend than any previous iPhone.
Part supply may have affected early sales after the opening, but the supply chain issues are solved and the phones continue a brisk pace of sales. That's wonderful, but there is still something more important to consider.
Apple's ecosystem tends to make customers sticky. iTunes, apps and other digital products are sold in increasing numbers from the growing base of customers. It's the ecosystem that investors should focus on. Without an enterprise email structure keeping RIM relevant, the Canadian company would have most likely become another PALM, and basically sold for scrap.
Don't get overly caught up in this earnings report. Especially from metrics that should never have a quarterly focus (good or bad). Look for trends spanning several quarters, and use the higher implied volatility to sell option premium, not buy it.
I believe Apple will test $600-plus again within 12 months.
At the time of publication, Weinstein was long INTC.
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While they don't know when it will burst, they do recommend looking to Europe if you want a safer bet.
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