It may seem odd that after saying that Apple Inc. (AAPL) was a buy at $117, that I should turn around and suggest shorting the stock at its present price. Well, if I can’t be honest with my readers and share when I learn new information, then I’m not much good.
In truth, I still believe that Apple stock is a long-term buy and a long-term hold. All the reasons I’ve mentioned previously still apply. However, sometimes short-term situations arise that create an opportunity for a trade within a long-term position.
Many times I suggest hedging your overall portfolio with some short positions, for example.
I was alerted to this opportunity by private equity manager Ovadia Ovi Levy, managing member of KPL Capital, LLC, in Naples, Florida. Ovadia Levy is short Apple stock, and when he first told me that, I thought he was crazy. Then he pointed out a few big things I had foolishly missed about Apple stock.
Headwinds for AAPL Stock
“Almost two-thirds of Apple revenue comes from the iPhone,” Ovadia Levy mentions. “Apple usually comes out with a new version of the phone in Q4, but it did not do so this year. That’s why I think Q4 results are going to disappoint.”
Ovadia Levy feels that the market’s love affair with Apple stock has blinded most investors to the company’s dependency on the iPhone. “They are not seeing the broader picture. Look, the Apple Watch is cool. I own one. But it’s a watch, and that’s not going to make Apple stock go up.”
Another thing Levy pointed out was something that was already on my radar: that the global economy is in bad shape. 62% of Apple stock revenue comes from international markets. With the global economy in a rut and China’s economy grinding to a halt, plus the miserable effect that the strong dollar is having on results, Ovadia Levy thinks that the market is being too optimistic about the market, and about stocks like AAPL.
He also pointed out something I had totally missed, but that my InvestorPlace.com colleague John Divine has hit on: AAPL may have $206 billion in cash and investments, but $181 billion of it is trapped overseas. Thanks to America’s insane corporate tax rate of 35%, if AAPL repatriates that money, it could incur a tax bill of up to $63 billion.
That might help the federal deficit, but it won’t make AAPL or its shareholders happy.
“The cash isn’t doing anything. It just sits there,” Levy says. He says America needs to change its corporate tax rates for exactly this reason. The AAPL stock price would go up significantly if it could bring that money home, because more would be deployed for growth, for shareholder dividends and buybacks.
Will AAPL Stock Drop Another 10%?
In the meantime, Levy is short AAPL stock because he thinks the stock will trade as low at $90. Not only is the overall market wobbly, but he thinks Q4 numbers will hit Apple stock pretty hard.
I think he’s got some very good points. I didn’t even realize how much Apple depended on the iPhone, or how often it released one in Q4. I also didn’t realize the overseas cash situation. In valuing Apple stock, its $37 per share in cash is really more appropriately valued at $26 per share, assuming eventual repatriation at the high corporate tax rate. At $90 per share, as Levy suggests, then AAPL stock would be effectively valued at $64, backing out the net cash position.
At that price, the company would have a market cap of $357 billion, net of cash. With $53 billion in trailing-12-month earnings, that would give it an effective price-to-earnings ratio of 6.7. That’s definitely a buy.
You are allowed to carry both a long and short position on a stock. This is known as “shorting against the box.” Just be aware of certain tax ramifications if you choose to do so.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he did not hold a position in any of the aforementioned securities. Ovadia Levy, interviewed for this article, is short AAPL.
