Why the News Could Get Worse for Apple Shareholders

‘Nokia started as a wood-pulp and paper company in 1865 before expanding into rubber, electronics and eventually telecommunications. The company has paid a dividend every year since at least 1871…’ – Bloomberg News

In investing everything is certain until it isn’t.

Nokia continued to pay dividends while Finland experienced Russian Tsarist occupation, Soviet communist invasion, and a Nazi Germany-assisted counter-attack against the Reds.

All through this time, even through the dot-com bust, Nokia kept dishing out dividends to investors. That was until now. 143 consecutive years of dividend payments has ended.

For 143 years a Nokia dividend was as reliable as the sun coming up in the morning. Except in the winter months in Northern Finland when the sun doesn’t come up at all, but you get the point.

But Nokia isn’t the only stock that upset investors this week. And if one top analyst is right, for this stock further disappointment is on the way…

After the US stock market closed on Thursday morning, technology and fashion accessory giant, Apple [NASDAQ: AAPL] released its first-quarter results.

The company brought in a staggering USD$54.5 billion of revenue. Got that? USD$54.5 billion in just three months.

Just to put that in perspective, the world’s biggest mining company, BHP Billiton [ASX: BHP] dragged in $71.3 billion for the entire year. So when people bang on about Apple’s amazing success, they aren’t kidding.

Whichever way you slice, dice and blend it, Apple is a cash-generating machine. Based on the previous financial statements, Apple had $29 billion in cash and short-term investments. That’s good.

Having a big chunk of cash in the bank and no debt is a dream for any company (especially the small-cap stocks we analyse which usually run on the smell of an oily rag). But while big cash balances may make management and staff feel secure, it’s not what turns on investors.

Take another major technology stock, Microsoft [NASDAQ: MSFT]. Microsoft has USD$63 billion in cash on the balance sheet. Yet its share price has done nothing for ten years.

It just goes to show that cash isn’t always king.

But back to Apple, the company brought in USD$54.5 billion in revenue. Great news, right? Not quite. Apple management commented about forward-looking estimates that…how can we put it…spooked investors.

Apple shares fell 10.5% at last night’s open, and didn’t get any better. The shares closed the day down 12.4%.

But the news could get worse for Apple and its shareholders. Top US technology analyst Jeff Gundlach figures the stock price will hit USD$425 sooner rather than later, and if it breaks below USD$400 then the next stop is USD$300.

So, what does this all mean?

When $54 Billion Isn’t Enough

Think back to the article we wrote in Money Morning last week. It was titled, ‘CBA Shares Priced for Perfection‘.

In the article we pointed out that when a stock is priced for perfection (in other words, all the good news is already built in to the share price), even a small drop in revenue or profit can cause a big impact on the share price.

Why? Because the stock is ‘priced to perfection’…investors believe nothing could go wrong so they’re happy to pay a premium.

In Apple’s case, the company forecast that the current quarter’s revenues would be between USD$41-$43 billion. That wasn’t good enough for analysts who have forecast USD$45 billion.

So despite a huge result, analysts are already looking at the next quarter. And they don’t like what they see.

Even the news two weeks ago that Apple customers had downloaded 20 billion apps during 2012 wasn’t enough. That’s 54.8 million apps downloaded per day…2.3 million apps per hour…38,051 apps per minute…or 634 apps per second.

As we said last week, when the stock market is priced for perfection and it seems nothing could go wrong, that’s exactly when things can go wrong.

At the start of this year, Diggers & Drillers editor, Dr Alex Cowie asked your editor for our year-end forecast for the S&P/ASX 200 index. We shot back as quick as a flash our prediction – 5,002 points.

Yesterday the index closed at 4,810. That means it only needs to rise 4% to reach our year-end target…and we’re not even into February.

Look Out for a Short-Term Pull-Back

We won’t say that scares us. Because with our ‘safe money’ and ‘punting money’ asset allocation, we’re protected if the stock market hits the skids.

But we will say that the stock market has rallied too high too quickly. Much faster than we expected.

While we’re still a buyer of this market (especially small-caps which were hammered through 2012), it wouldn’t surprise us if blue-chip stocks took a break in the coming weeks.

Bottom line: we could see some evening out in the market in the next few weeks. That means it could be a great time to short sell stocks that have outperformed the rest of the market, and buy quality stocks that have underperformed.


From the Port Phillip Publishing Library

Special Report: The Big Money Secret of Ironstone Mountain

Money Morning:
How to Play the EU Referendum for Profit

Australian Small-Cap Investigator:
What are Small-Cap Stocks?

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia