S AAPL

This is kind of a joint post between Mike and myself, as we have both sold Apple (AAPL) in the last week (although he did get a slightly better price, and he sold a partial position while I offloaded it all) after having some discussions about the stock.

Our thought process was very fundamental, and it revolved around the question: what isn’t priced into the stock?  There is no bad news surrounding AAPL right now.  Any thoughts that they, being a manufacturer of premium products, would be struck down by the recession have been quelled as they rolled out earnings numbers that almost defied belief.  The myth that without Steve Jobs the company would be a body with no head has been squashed, as they performed admirably during the health-related absence of their CEO. They continue to excite and amaze the population with relatively minor and incremental upgrades to their products, due to the strength of their existing market position and their incredible marketing abilities.  And finally, the ever-persistent rumors about a tablet or touchscreen notepad-like product have reached the pinnacle as analysts expect a product arriving early next year that will energize that dormant segment like they did the music and mobile phone industries.

As I said before, there seems to be no bad news priced in, but I see a few dark clouds on the horizon. Windows 7 is arriving soon, and is supposed to be the first product from Microsoft (MSFT) that can truly compete with OS X.  Unlike their other industries, AAPL does not enjoy a strong market position in the PC field, and so have to rely on slick marketing to win customers. Their main message recently has essentially been “Windows sucks, OS X doesn’t,” and when that goes away, what do their marketers fall back on? This new tablet concept hasn’t materialized in the years that the rumors have persisted, but it appears that it is for real this time. But what if it flops? This is highly speculative, but if AAPL has a very high profile failure on their hands (much bigger than the Apple TV), the stench may flow to their other offerings and wake people up to their competitors products (such as the much improved Microsoft Zune HD, or the new premium Dell laptops (DELL)).

AAPL is about 5% below its all time, intra-day high of approximately 202.98.  That price was reached in December 2007, just before the financial crisis really took hold of the markets.  At that point, there were equally no reservations among analysts that AAPL was going to the moon. It was after that point that doubts began materializing.

We expect AAPL to perform well, and we aren’t calling a top on AAPL. However, until we see a catalyst for growth materialize, we do not anticipate their stock outperforming the market, making other places to put capital more appealing.

Disclosure: No position in AAPL or DELL, Long MSFT