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Next Big Thing, and on the topic of "Hold"

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January 25, 2013 – Comments (7)

This is my blog, and I ain't gettin paid for it, so I can cram two wholly separate concepts into one entry if I want.

Two entries ago, I posted about AAPL's valuation, which was unusually low at the time and has now sunk to historically quite low levels - P/E 10, closer to 8 net of cash on hand and 7 if you do my quicky trick of subtracting the dividend yield.  That's pretty low for a company that has been pushing out 80% y-o-y earnings growth for the past 8 years.

But a lot of respondents pointed out, correctly I believe, that AAPL is not going to sustain current earnings growth on their current products, not even if they introduce iPhone 6 and iPad 4.  Those products were revolutionary in their first iteration when they were introduced, but now copycats are flooding the market, competing well on price, and I think most would admit that AAPL's competitors are competing well on features and innovation, too, making them less 'copycats' and more legit competition.  It is hard to sustain an 80% y-o-y growth rate when your competitors are making cheaper products that are innovative and maybe even better.

So AAPL needs to put out the Next Big Thing if they are going to take the next step and hit the $1 Trillion market cap jackpot.   About one and a half years ago, I made a CAPS blog post outlining this thesis in a bit more detail, and laying out the timeline that I anticipated, and why; and right at this moment AAPL is coming down to the deadline I set, August 2013 (or maybe September, although AAPL lately seems to have abandoned the back-to-school month as the one they use to introduce truly revolutionary new products.)

The current share price is really not about valuation - I happen to agree with my commenters about that.  Rather, it is a bet by AAPL shareholders that Apple are simply not going to do it - that Steve Jobs was the magic catalyst and that current management (having let Scott Forstall, Bertie Serlet, and a lot of other key employees go) has lost its way, has not been able to inspire with leadership, and has no path to the Next Big Thing.  For once, I have no opinion; I am watching and waiting, and I am not heavily invested in Apple at this time - I sold about 3/4 of my stake at $678, and if you were paying attention to my blog, so did you.

The other thing I want to talk about is Buy, Sell, and Hold.

What the heck is Hold?  It is a recommendation to not sell if you have some, and not buy if you don't.  In other words, it is a recommendation to not buy and to not sell the stock.  This recommendation contradicts itself.  If frictional costs (bid-ask spreads, commissions) were a big deal like they used to be, it might make sense, but I feel like the average transactional frictional cost on one of my trades is about 0.1%, and I'm a dumb retail investor - people with more money have even lower costs.

A Hold recommendation is useless to me.  It doesn't help me know what to do.  It makes me not know what to do.  I wish that analysts would be honest and say that their recommendations are Buy, Sell, and I Don't Know, and in the future whenever I see "Hold," "Neutral," or "Equal Weight," I am going to mentally translate that analyst's opinion to "I Don't Know." 

7 Comments – Post Your Own

#1) On January 25, 2013 at 11:12 AM, ikkyu2 (99.32) wrote:

Another word on "Hold."  Some might say that it is an expectation that the stock will in-line perform, and indeed "in-line perform" (with the broad market, usually) is a recommendation you occasionally see.  "Stagnant price" is another recommendation that you might translate "hold" to.

Either one of those would be useful because you can make money off it with options if it comes true.  An iron butterfly or some variant thereof is what you use when you don't think the price is going to change much; if you are willing to go the next level and hedge your butterfly against the S+P (it takes a little math, not much, and a few more options,) you can make money when a stock in-line performs the market, no matter what the market does.

Full disclosure:  1)  I own a long position in AAPL.  2)  There is no iron butterfly for romantic relationships. 

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#2) On January 25, 2013 at 1:40 PM, Turfscape (45.91) wrote:

>>A Hold recommendation is useless to me.<<

My biggest financial news pet-peeve are the wire announcements from Financial Analyst firms that state something like "Zacks initiaties coverage on XYZ with a neutral rating".

Seriously? You're going to start covering analysis of a stock, tell me nothing about it, and put THAT out as a news release? The firms that do that deserve to be slapped!

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#3) On January 25, 2013 at 2:56 PM, chk999 (99.97) wrote:

If you are a value investor, then most stocks are a hold. They aren't cheap enough to buy and aren't expensive enough to sell.

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#4) On January 25, 2013 at 4:46 PM, TheDumbMoney (44.25) wrote:

Agree with chk999.  I often set my buy price 20% below what I think "value" is, wildly inaccurately estimtaed though it may be.  I set me sell price about 30% above that, as readjusted over time.  I haven't sold a stock since the summer, and I haven't bought anything since 10/2012.

Apple is in the grip of technical traders who "want" $430, plus a situation where it was very over-owned, plus the conversion from being a growth to a value stock.  With its implosion following a tiny eanings decline (on a 13 week quarter, as opposed to last year's 14 week quarter) it is now basically priced for flat to declining earnings as far as the eye can see.  It is an interesting story.

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#5) On January 25, 2013 at 10:57 PM, Valyooo (99.45) wrote:

What about these analysts that do something like this: 

Stock is trading at $200.  Analyst original price target was $500, with a buy rating.  They downgrade it to sell with a price target of $300.

So a 50% upside is sell 

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#6) On January 26, 2013 at 4:08 PM, somrh (86.12) wrote:

I thought analyst categories were:

Strong Buy
Buy
Hold

:P

 ....

On a serious note there is some value to the "hold" idea. Because there's another sort of "transaction cost" associated with trading out of a security:

Information cost.

If I own a stock that's more or less fair valued and I've owned it for several years, I know a good deal about the company and it's financials. I've already read severaly 10-k's and have been following news of the company. I'm going to be somewhat inclined to hold it.

So the actual opportunity cost is between:

1) Holding a company I already know that's currently about fair value.

2) Acquiring information about a company I don't know which may or may not be selling at a good bargain.

I believe there are situations where hold is more appropriate. If you have already done the research and you know of some good opportunities, then trade up to the better opportunity.

But if I haven't already done the research, why should I spend time researching a new opportunity (especially in an environment where there may not be many) when I already own a perfectly good stock that, while may not be a bargain, will still provide me an adequate return?

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#7) On February 09, 2013 at 10:03 PM, ikkyu2 (99.32) wrote:

Depends on how valuable your time is and how good you are at assimilating and interpreting the data, somrh.  Since there is money involved here, those things have to be weighed against your possible gains.

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