Trading Apple Now Is Risky Business

Readers may or may not recall that I wrote to you concerning Apple (AAPL) back in late November. There was Covid policy -related unrest across many cities in China at the time, and Foxconn Technology was having trouble with staffing at facilities where Apple mobile devices are manufactured.

I started that piece out by mentioning that “Some investors might be wondering why after two and a half years, Apple is still so reliant upon supply lines buried deep inside a nation that is still fumbling its way through an economically inconsistent and quite disastrous Covid policy.”

I read the situation almost perfectly. How I traded around the situation while far from perfect, did prevent disaster. I had mentioned in that piece that I had made sales of AAPL in both early September and late October. Those were sharp sales indeed. Unfortunately, I also mentioned that I had recently (at that time) repurchased the September sales in early October. The last sale was $148.11 at the time I wrote that article. The stock closed at $129.93 on Friday afternoon.

I had mentioned in that piece that should AAPL lose its 50 day SMA that portfolio managers would reduce long-side exposure. This is precisely what happened. I told you that I wanted to add between $139 and $135, which I did. I also told you that $135 was my panic point and I would make sales once I saw that level fail. I did that as well.

I stand here among you, on January 3rd, 2023, still long some AAPL. That said, this is my smallest long position in Apple in many years. I do not have the energy to dig up old accounts and figure out exactly how long. I ask myself now… “Is it time again to repurchase some of these shares that I have sold? Or is it time to cut bait completely and fish in some other pond?” Let’s explore.

News Flow

Regarding the concerns that I mentioned in November, Beijing has reversed in dramatic fashion it’s (economically) failed Covid policies in place since 2020, but this has unfortunately created an environment of accelerated spread for the virus. Estimates for full year 2022 and holiday season iPhone shipments have been in decline up and down Wall Street.

On Tuesday morning, manufacturing at the all-important facility in Zhengzhou is said to be running at 90% of capacity after having reported to have been running at 70% just last week. Readers may recall that last month JP Morgan analyst Samik Chatterjee had written that iPhone supply was “improving and inching slowly toward parity with demand.” Chatterjee, who is rated at five stars by TipRanks, rates AAPL as a “buy” with a target price of $190.

In regards to Apple’s overreliance on Chinese production, two weeks ago it was reported that the firm had asked Foxconn to start making MacBook computers in Vietnam as soon as this May. Vietnam is already where Apple makes many accessories such as AirPods, iPads and Apple Watches, so momentum to diversify away from China has been in motion and has momentum.

Now to diversify the manufacture of Apple’s revenue driving champion, the iPhone. So far, nothing on that. JP Morgan has estimated that 25% of all Apple production might be done in Vietnam by 2025.

Earnings

Apple is not expected to report the firm’s fiscal first quarter financial results for another three weeks. Wall Street consensus view is currently for GAAP EPS of $1.99 within a range spanning from $1.82 to $2.12. This would be on revenue of $123B within a range spanning from $116.5B to $129.5B. Should this consensus be realized, 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 projections for Apple since the September quarter was reported. Revenue growth is seen being restored for the March quarter.

Fundies

Free cash flow has remained strong for Apple right through the September (most recent) quarter. Can that remain so? Even as the quality of the balance sheet has deteriorated over the three most recent quarters? Sounds ridiculous, I know. We always hear so much about Apple’s net cash position, which was $48.304B in September or little more than half of what it stood ($94B+) in March of 2020.

Current assets stood at $135.405B in September versus $153.982B in current liabilities. that included $9.982B in short-term debt. That’s a current ratio of 0.88. Not really all that acceptable. What’s worse is that the September quarter was the third consecutive quarter that Apple ran with a current ratio of less than one. The firm also had $98.959B in long-term debt on the balance sheet, $11.128B of which has now moved into the current equation. Suddenly that $48B cash position just isn’t all that large.

Should that free cash flow dwindle to some degree, which has not happened yet, I could see Apple pulling back on the firm’s share repurchase program. Apple returned $29B to shareholders in the September quarter, $25.2B of which was in the repurchase of 160M shares.

My Thoughts

As readers can probably tell, I am not in love with Apple or its stock. I think the firm should prioritize the balance sheet even at the expense of returning funds to shareholders. Such activity would obviously be a market negative. There will be no growth, at least for now. What we are left with is a cash flow beast, and that’s nothing to sneeze at, but at 21 times earnings?

I am not likely to be very quick about rebuilding my long position. Really the only reason that I have held on to a smallish position is that this is the most widely held name in US markets. If one is trying to perform with or outperform the S&P 500, or any major US large cap equity index, it becomes difficult to exit this name completely.

Readers will see that the stock made a lower low last week than it had in June. With weak relative strength and a sloppy looking daily Moving Average Convergence Divergence (MACD) oscillator, this could be significant. The downtrend is still intact. I would rather add on a change in trend supported by volume as the stock retakes at least one of its moving averages than try to add right now. My current panic point is $126. That’s where my current tranche would be down 8%.

A trader wanting to take a risk averse bullish position going into earnings could get long a January 27th $129/$135 bull call spread, for less than $3 this morning.

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