Shorting Apple with a target of $250
- Thread starter retaildaytrader
- Start date
AAPL has set the bar high for earnings, running 75 points in the past month and a half. I think they are going to have to kill the estimates Monday after the close to move the stock higher. Check out the Bollinger Bands on the daily on the attached chart. I don't personally gamble on earnings either, but definitely will be interested in what happens after the release.
Just posted my look ahead at this earnings week on my blog if anyone is interested:
http://independent-trader-ken.blogspot.com/
Just posted my look ahead at this earnings week on my blog if anyone is interested:
http://independent-trader-ken.blogspot.com/
I remember 2008 well - that was when you could acquire AAPL for $80 per share when it had $30 per share in cash and the historic earnings were $5 per share, giving it a historical PE of 10. Stripping out the cash, it was selling at 3.3 times 2010 earnings.
In any case, even if for some reason you think a PE of 10 is fair value for a fast-growing debt-free quasi-monopoly cash-generative business like AAPL, then you must think the S&P is worth much less. In that case, shorting AAPL makes no sense - you should rather short the far inferior businesses in the rest of the S&P 500. Long AAPL vs short S&P is the trade to make if you think the market as a whole is overvalued.
But that is true for every stock from the long or short side. All stocks can fall 25 or 50%, or rally 50 or 100%. Stating that tells us nothing. By the same logic, you should consider if you can hold your short if the stock goes from 320 to 480 or 640. At least the guy on the long side has the advantage that at 160, AAPL would be selling for about 8 times earnings, once you adjust for its cash horde, and would be a screaming bargain which it would make perfect sense to double up on. Whereas the short seller has no such comfort.
A conservative valuation of a blue chip growth business like AAPL would be about 20 times historic earnings. That gives about $315, once you include the cash horde. I.e. at the current price it is priced pretty conservatively based on historic profit.
A more neutral valuation would be about 25 times forward earnings. This requires the growth to hold up, but that seems a reasonable assumption. So what is Apple going to make in 2011 - let's say 16. That would imply a valuation by 2011 year end of around 450, assuming its cash horde does not grow significantly. That's almost 50% above the current price, a pretty good return for 12-18 months.
Now, consider that we are in a bull market, and by the end of all historic bull markets, valuations got to pretty optimistic levels. Apple in 2006, 2007, and early 2008 got to 40-45 times historic earnings, for example. Let's say in 2011 earnings reach 16, not exactly a huge stretch of the imagination. At 40 times PE that would imply a price of $850 per share. If Apple beats earnings in the next year or two, a 40 PE would imply $1000 per share. I wouldn't bet on it hitting there, but then I'm not shorting the stock. If I was shorting it, I would definitely be asking myself how high it could go if it merely reaches the kind of valuation that past bull markets repeatedly threw up, and if it beats earnings as it has done in the past.
A stock that would be a screaming buy at $200 (10 times cash-adjusted likely 2010 earnings), and could hit 450 on conservative assumptions, and hit 1000 on optimistic ones, cannot be a screaming short at 320. At most it can be a short-term play - but aren't there other stocks that are much better short-term plays? Like housing, PIGS financials, or other businesses that are falling apart rather than doing very well?
Yep I would not want to gamble on earnings as a short-term trade. I am long as an investor, not a trader - there's no way I would have been able to hold the stock all 2010 and most of 2009 if I had been trading short-term with a close stop, it fell from 278 to 235 for example, and 260 to 200 in the flash crash. And it's quite possible it initially rallies, then sells back since this is clearly pricing in fairly good earnings news.
But those are short-term factors. As a short-term trade, we have to look at major support, which is the prior breakout level of $278. Any short here takes a serious risk of a huge Google-like pop if earnings are insanely good, and has maybe 30-35 upside if it works. That's nothing but a risky coin flip. And consider that RDT was short from way below $316, he literally shorted as the stock was making a sustained break-out to a new all-time high, one of the dumbest trading errors in the book.
Apple at 280, 290 was not a short, it was a breakout buy on the classic Livermore/Darvas/O'Neill/Zanger/Turtle trading method. Every trading rule in the book says buy strong, sustained breakouts to new all-time highs of great companies with high earnings growth and great fundamentals and news flow. Not to short them, and especially not to short just after a breakout. And if I had not already been long a full position, I would have definitely added more on that breakout, it was an obvious trade.
Apple today is a coin flip short-term, but probably still a very good investment long-term.
I did not say AAPL is a screaming short at $320. The problem is that expectations for AAPL is high and if AAPL profit goes up "ONLY" 300%, people will dump the shares because it went up only 300% !! but if housing loss goes from -5 per shares to -4 per share, their stocks will double !!
though AAPL has reached to the level of high risk area. wouldn't want to carry a rock! rather tiresome!