Readers may or may not remember that I wrote to you about Apple (AAPL) back at the end of November. There was Covid-related political unrest in many cities across China at the time, and Foxconn Technology had staffing issues at facilities where Apple mobile devices are manufactured.
I started this article by mentioning that “Some investors might wonder why after two and a half years, Apple is still so dependent on supply lines buried deep within a nation that is still navigating its way through Covid politics. economically incoherent and quite disastrous.” .”
I read the situation almost perfectly. The way I negotiated around the situation, while far from perfect, prevented disaster. I had mentioned in this article that I had made sales of AAPL at the beginning of September and at the end of October. These were indeed strong sales. Unfortunately, I also mentioned that I had recently (around this time) redeemed September sales in early October. The last sale was $148.11 at the time of writing this article. The stock closed at $129.93 on Friday afternoon.
I had mentioned in that article that if AAPL lost its 50-day SMA, the portfolio managers would reduce the long exposure. This is precisely what happened. I told you I wanted to add between $139 and $135, which I did. I also told you that $135 was my panic point and I would sell once I saw that level fail. I did that too.
I stand here among you on January 3, 2023, a long time from AAPL. That said, this is my smallest longest position at Apple in many years. I don’t have the energy to dig up old accounts and figure out exactly how long. I wonder now…”Is there still time to buy back some of those stocks I sold? Or is it time to completely cut the bait and fish in another pond?” Let’s explore.
News Feed
Regarding the concerns I mentioned in November, Beijing has dramatically reversed its (economically) failing Covid policies in place since 2020, but this has unfortunately created an environment of accelerated virus spread. Estimates for all of 2022 and iPhone shipments for the holiday season have been falling up and down Wall Street.
On Tuesday morning, manufacturing at the all-important Zhengzhou plant was reported to be operating at 90% capacity after saying it was operating at 70% last week. Readers may recall that last month JP Morgan analyst Samik Chatterjee wrote that iPhone supply was “improving and slowly moving towards parity with demand.” Chatterjee, which is rated five stars by TipRanks, considers AAPL a “buy” with a target price of $190.
Regarding Apple’s overreliance on Chinese production, two weeks ago it was reported that the company had asked Foxconn to start manufacturing MacBook computers in Vietnam as early as May. . Vietnam is already where Apple manufactures many accessories such as AirPods, iPads and Apple Watches.
Now it’s about diversifying the manufacturing of Apple’s revenue champion, the iPhone. So far, nothing about it. JP Morgan has estimated that 25% of all Apple production could be made in Vietnam by 2025.
Earnings
Apple is not expected to release the company’s first quarter financial results for three weeks. The Wall Street consensus is currently for GAAP EPS of $1.99 in a range of $1.82 to $2.12. That would be on revenue of $123 billion in a range of $116.5 billion to $129.5 billion. If that consensus were to come true, the quarter would be good for earnings “growth” of -5% on revenue “growth” of -1%. Twenty-three sell-side analysts have cut their December quarter revenue expectations for Apple since the September quarter release. Revenue growth should be restored for the March quarter.
Funds
Free cash flow remained strong for Apple throughout the September (most recent) quarter. Can it stay like this? Even though the quality of the balance sheet has deteriorated over the last three quarters? Sounds ridiculous, I know. We still hear a lot about Apple’s net cash position, which was $48.304 billion in September, just over half of what it was ($94 billion+) in March 2020.
Current assets stood at $135.405 billion in September compared to $153.982 billion in current liabilities. which included $9.982 billion in short-term debt. This is a current ratio of 0.88. Not really acceptable all that. What’s worse is that the September quarter was the third consecutive quarter that Apple has led with a current ratio below one. The company also had $98.959 billion in long-term debt on the balance sheet, of which $11.128 billion now entered the current equation. Suddenly, that $48 billion cash position just isn’t that big.
If that free cash flow declines to some extent, which hasn’t happened yet, I could see Apple withdrawing the company’s stock buyback program. Apple returned $29 billion to shareholders in the September quarter, including $25.2 billion in the repurchase of 160 million shares.
My minds
As readers can probably tell, I’m not in love with Apple or its stock. I think the company should prioritize the balance sheet, even at the expense of returning funds to shareholders. Such activity would obviously be a negative market. There will be no growth, at least for now. What we’re left with is a cash flow beast, and that’s not to be despised, but at 21 times earnings?
I probably won’t be very quick to rebuild my long position. Really, the only reason I kept a small position is because it’s the most popular name in US markets. If one is trying to outperform or outperform the S&P 500, or any major US large-cap equity index, it becomes difficult to completely get away from that name.
Readers will see that the stock hit a lower last week than it did in June. With low relative strength and a sloppy daily Moving Average Convergence Divergence (MACD) oscillator, this could be significant. The downtrend is still intact. I would rather add a volume backed trend change as the stock retakes at least one of its moving averages than try to add now. My current panic point is $126. This is where my current slice would be down 8%.
A trader willing to take a risk averse bullish position before taking profits could get a bullish buy spread of $129/$135 on January 27, for less than $3 this morning.
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