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Saturday, May 16, 2009

Why Do People Buy Apple Stock?

I mean really, what do you actually get from Apple in owning the stock? They pay no dividends and I just checked the Yahoo page and they are selling at a P/E of 22.04. Is that a bargain? Should the P/E be higher? Lower? Who makes that decision? Why do people buy Apple? Why were they only $78.20 just a short few months ago? Did Apple improve so much better in a few months?

OK, I could have picked any stock for my example. And I am sure many readers would see my headline and say to themselves many different reasons such as "Well they have no debt and cool products and everyone loves them!" or "The book value is outstanding" or "My God man, they have like $29B cash on hand!"

Who cares about book value? I mean is it like Apple will all of a sudden decide to go out of business and they divvy all that cash to the shareholders? You think ? hehe. That's the bad thing about huge cash reserves! It guarantees you'll never see a dime of it. Ironic yes? For if a company is "healthy" and has cash, they are in no danger of giving any of that cash away yes?

So I ask again, why do people buy Apple stock? Well the real answer is so they can pawn it off to someone else for a profit! But of course, that's the stock market in a nutshell or any asset-mania driven enterprise. Its also how Elliott waves works. Investor sentiment or social mood. Good mood = people will buy Apple for $130 thinking a) it will go up forever b) they can pawn it off to the next sucker for a $160 when a higher price is made. Kind of like how a Ponzi works.

So why cannot Apple sell for a P/E of say 9? Is that crazy? Think so? Think good, cash riddled companies never sold for less than 10 P/E in the stock market's history? Lets say Apple went to $40/share. Is that a bargain? They still have like $29B cash on hand (or whatever they have) so you think its a bargain? Why? Will you ever see a dime of that even at $40/share? Who determines what is a good value? The investment bank analyst who recommended Apple at $180?

OK so most every reader here knows the "game". That's what it is. We are playing the world's greatest Ponzi and when a majority of people don't feel like buying Apple stock even at $79 share, the price will drop further still. Who cares how much cash they have on hand. You'll never get a dime of it.

That is until they start paying people to buy their stock. Apple will eventually cave into paying a dividend. Bear markets bottom have high dividend ratios. Look it up. Its one thing EWI does well is provide that kind of detail (well worth the price). When will Apple pay a dividend? Answer: Probably not during P2! Maybe P3,P4, P5.....

Apple has great products but they are too expensive. I commend them for not pocketing the excess cash in needless stock buybacks. However they can easily be viewed as greedy. Why do they milk every last $$$ from consumers when they have $29B cash on hand? Will the public wake up to that ? I think so.

People will shun Apple and its products in P3 and it will show up on their balance sheets. Hoarding $29B will not set well with the masses when they cannot make mortgage payments and a macbook is like $2500 still. Apple's stock will go down.

I predict social mood will turn against companies like Apple and Google. Just think Microsoft. What else will happen? Big Government will go after Apple (and Google). Why? Because they have so many $$Billions. Social mood will demand it.

But I am starting to digress. Things aren't getting better folks. We are just on a debt-induced, doubled-down P2 honeymoon. Enjoy it while it lasts. Know one knows when it will end. But we have some good guesses.


  1. great analogy.....even the masses sense too..........condemned mans last meal.......steak and lobster.....howz that heeheh

  2. yep, great post.

    So you still think P2 isn't over daneric?

  3. p2 can be over only after 5/p1 is over and that hasnt happened yet.

  4. P2 just over...

  5. compare that to JPM PE of 65 as of Friday.

  6. It does make sense to buy 50 and short 20 different stocks if the model say so. Within a model AAPL price makes sense because it is offset with different positions.

    But as many people just go buy 50% AAPL and 50% GOOG that is a Ponzi.


  7. Personally I think there is a possibility we are in P1. However, EVERY major wave observer that i respect sez otherwise. As a trader i am aggressively short from levels just above here. If i get stopped out it will be for a small loss. If my suspicions are correct it will be a great trade.

  8. I agree with a couple others on here. I think there is a good possibility that we are in Wave 4 of P1, that the March low of 666 was the end of Wave 3 of P1. Just like Jack Ruby says, major wave observers including EWI believe this is P2, but I've seen several other traders who I respect say this is Wave 4 of P1. The one thing they all agree on is that we are going down in the immediate future. BTW, even EWI's May 15 STU for the NASDAQ, shows the thought that this is Wave 4 of P1 as their alternative and has commentary leaving that open as a possibility. I think we need to be open to both scenarios until the market shows us.

  9. That i what i was thinking about Apple.
    As social trends are changing, your friends are going to think that you are a stupid instead that a cool guy for buying an overpriced gadget.

  10. I agree with you 100% Dan. Why own any common equity at these p/e multiples?

  11. Great true.

    We can talk about value with DIVIDENDS.

    a stock or asset is worth the present value of future discounted cash flows...there is no cash flow without dividends.

  12. I'm a research analyst for a money mgmt firm and after years of doing this I can tell you that P/E's are a pretty terrible way of valuing companies. The math is easy but that doesn't mean it's a good method. In general, I hate valuation multiples but if you're going to use them consider what returns on equity (and use P/B) or returns on capital a company has in order to determine the multiple. Higher returns equals a higher multiple. AAPL's return on invested capital is 50%+ which puts it in the top 5% of all companies. Another reason why tech companies with high cash balances trade with such high PE's --- if you assume that the earnings yield on cash is around 2%, the P/E on cash is 50 ($1/.02) so some portion of the company's valuation is represented by the cash but that portion only earns 2% which skews the P/E much MUCH higher.