4 Things to Watch for if You’re on the Apple Fence

by Marc Bastow | February 19, 2013 7:00 am

I hear this refrain (and its follow-up question) virtually every place I go:

“I lost a lot of money on Apple (NASDAQ:AAPL[1]) but I couldn’t pull the trigger. What should I do?”

I answer, after a long pause, “Me, too. Ask me again in a few weeks.”

Why a few weeks? Well, for one, that time period would include Apple’s annual shareholder meeting Feb. 27, which I suspect will be pretty interesting. CEO Tim Cook & Co. face the ire of investors — including noted hedge fund manager David Einhorn[2] — and many of them want some sort of reassurance going forward.

I bought into AAPL for the very long-term several years ago, hoping that Steve Jobs would relent on his policy and return dividends down the road. As it turned out, I got those dividends. Of course, I also got more share appreciation than I could’ve expected, and while maybe I should have gotten out[3] … we’re back to hoping this is a long-term play.

So, what do I want to hear and see over the next few weeks, including at Apple’s shareholder meeting? Let’s look at a few topics:

Use of Cash

$137 billion is a lot of money to parcel out … of course, no one’s expecting AAPL to dole it all out, either. Still, last year’s big dividend start was just that — a start; we need to see an increase, and soon.

I’m not a fan of buyback programs — they’re often a chance for CEOs to prove how inept they are at spending cash[4] — so I won’t be too excited to hear the word “repurchase.” One long shot I’m quietly hoping for: a stock split, which of course doesn’t actually increase what you already have invested, but lower nominal stock prices can gin up interest among individual investors.

What I Want to Hear: A dividend increase somewhere in the 15 to 20% realm, which would be well within Apple’s means. (And deep down, a stock split. But I’m not holding my breath.)

Popularity

People who called this pullback correctly saw the signs and read them correctly: slowing sales, lower revenues and perhaps most important, growing competition. 

Samsung (PINK:SSNLF[5]) has risen to true-contender status in the mobile market. Its Galaxy line-up is killing it, passing U.S. iPhone sales during the third quarter of 2012[6] before ceding ground in the fourth quarter[7]. Really helping Samsung is its lower-cost lineup — especially abroad, where telecom subsidies aren’t as generous (and even nonexistent in some places).

Meanwhile, Nokia (NYSE:NOK[8]) also is winning hearts both in Europe and in China thanks to its Lumia line, and BlackBerry (NASDAQ:BBRY[9]) just launched BB10 and some new devices to go with it, too. There’s a host of others I won’t mention, but the point is clear: There’s no shortage of options.

What I Want to Hear: How Apple plans on selling more phones, especially in international markets, particularly in Asia, and what kind of margins Apple expects from those sales.

David Einhorn

A year ago, I wouldn’t have dreamed that activist investor David Einhorn would ever get involved with Apple. He recently has been rattling sabers, pressing Apple to dole out preferred shares. Frankly, I’m in agreement with James Brumley in thinking that this smacks of “showboating,”[10] and I’m not even sure that preferreds would be the best outcome for the average Joe AAPL shareholder.

What I Want to Hear: Nothing, at least as far as Einhorn is concerned. The best possible outcome Feb. 27 is a meeting that proceeds as if Einhorn never had opened his mouth.

Value

I’ve already coughed up a significant amount of profit, so the big question is: Do I wait it out and hope to recoup all of it, or sell some down to take what’s left and hope for the rest?

Well, looking into the next year, according to Financial Times, “The 45 analysts offering 12 month price targets for Apple Inc. have a median target of 620.00, with a high estimate of 888.00 and a low estimate of 465.00.” However, we’ve already gone below the low and never touched the high, so I’m a tad skeptical about the pie-in-the-sky rebound.

What I Want to See: In the short-term, though, we’re merely looking for more improvement over the 52-week bottom of around $440 set in late January. While Apple looked like it might be past the worst for the couple weeks following that low, AAPL went back to sliding last week. If we fall below that $440 point again, depending on your entry point, you might want to consider finally exiting.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long AAPL.

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. noted hedge fund manager David Einhorn: http://investorplace.com/2013/02/would-preferred-shares-really-help-depression-era-apple/
  3. while maybe I should have gotten out: http://investorplace.com/2013/01/3-retirement-lessons-from-apples-fall-aapl-amzn-ixn-cs-jpm-gs/
  4. CEOs to prove how inept they are at spending cash: http://investorplace.com/2012/12/dont-celebrate-a-rush-into-to-stock-buybacks/
  5. SSNLF: http://studio-5.financialcontent.com/investplace/quote?Symbol=SSNLF
  6. during the third quarter of 2012: http://investorplace.com/2012/11/samsungs-galaxy-s3-knocks-iphone-4s-from-its-throne/
  7. in the fourth quarter: http://investorplace.com/2013/02/friday-apple-rumors-apple-tops-samsung-in-phone-shipments/
  8. NOK: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOK
  9. BBRY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBRY
  10. this smacks of “showboating,”: http://investorplace.com/2013/02/apple-einhorn-the-path-to-insanity/

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