“Trader Arbitrage” and an Actual Apple Valuation Analysis
I have been holding Apple stock since mid-ish 2011. I bought “late”, in the $350 to $365 range. I bought because my analysis showed a twenty percent discount to this model's (the linked chart has since been updated — see below) estimate of the value of the firm. I have not added shares since then. I have watched the recent rise with amusement, happiness, and some trepidation. I have also avidly followed how the technical guys, the traders, think about it.* (I generally find them amusing, and I am grateful as a citizen for all of the capital gains taxes they pay each year in exchange for their unceasing and frenetic efforts.)
The setup. I think the parabolic move upwards to $640 was driven both by fundamentals and by technicals. To some extent, all multiple expansions are a technical phenomena, no matter the fundamental component. And it’s clear to me right now that Apple as it swoons is in the hands of these technical traders, these chartists, the algorithms. No substantive news is driving this, I think. These guys (they’re typically guys it seems) have followed and exacerbated that move up. And now that it blew back through $600 on the downside there is blood in the water.
And it’s not just solo guys, however professional. The stock has been a favorite of hedge funds, too: everyone has/had to own it. Billions of dollars, controlled by charting/technical algorithms written by former electrical engineering and physics majors and professors, trade according to such charting schemes. They don’t care that Apple has a 10ish forward P/E. They don’t care that it has a super low PEG. They don’t care about recent revenue growth. They don’t care about free cash flow (more on that below). They. Don’t. Care. Here’s what they care about: price targets based on what the charts say. Now $553 is a major target for these folks. The most aggressive of them quote the history of retracements of parabolic moves and say it will go back to $430.
Thus I hereby inaugurate the concept of “Trader Arbitrage.....”
For the rest, see here.
Note that this was originally posted last night.