Apple Earnings

This Tuesday Apple is reporting second quarter earnings. I have been debating for a while about whether to start initiating a position in Apple in wake of the significant drop in price. If the price of Apple stays at around $390, I will initiate a position in Apple before earnings for the following reasons:

  • Trading at 6+ times this years earnings if you back out the cash. Hopefully, they can at least maintain earnings over the next couple of years.
  • Limited downside. I do not ses Apple stock dropping below $300. If it drops after earnings, it will allow me to buy at a cheaper price.
  • Low expectations this quarter. Verizon and Cirrus Logic’s results gave investors a peek into what will be a bad quarter by Apple’s standards.
  • Rampant negative sentiment on Apple shares.
  • Apple should announce what they plan to do with its cash pile very soon if not at earnings announcement. A $15 dividend would give the stock a yield around 4%.  A preferred stock would give the biggest boost to the stock price. However, I do not think this will happen.
  • Investors will start focusing on what’s next for Apple after the earnings report. Historically, this is when the stock makes a run. There are plenty of concrete things to look forward to: iPhone 4s, cheaper iPhone, iPhone introduction on China’s largest mobile network, China Mobile.
  • Even talk of potential new products whether it be a tv or watch could be a catalyst to the stock price.
  • Over the next couple of years, a lot of iPhone users 2 year contracts will be expiring which should give a boost to iPhone sales.

What’s preventing me from buying a ton of shares of Apple?

  • Limited upside. I do not see the stock going above $500 in the near term. It is now a value stock as opposed to a growth stock. 
  • Half of revenue dependent on iPhone.
  • If the stock price drops even further it will allow me to buy more shares.

Commonwealth

Commowealth (CWH) board is still battling hedge funds on control of the company. I own a small amount of shares I bought during the financial crisis. There was a good article in barrons this week recapping the battle. I urge any significant holders of the stock to join the battle against the board.

Orchard Supply Hardware Stores

Orchard (OSH) crashed after it hired restructuring lawyers. It trades below $2 now. I shorted at $14, but had to cover once it went below $5. I am still short the other spinoff Sears Hometown (SHOS). However, my brokerage made me cover some shares recently. A lot of value investors are bullish on Sears Hometown, but I have yet to be convinced.

Disclosure: I own CWH 

Insight From Einhorn’s Latest Picks

Greenlight Capital, the hedge fund run by famed investor David Einhorn, just came out with their quarterly letter to share holders. He had interesting comments on some positions:

Apple (AAPL)

Apple is Greenlight’s largest position. Greenlight bought back the Apple shares it had sold in the third quarter. In my last article, I advised readers to stay on the sideline on Apple shares. Obviously, Apple took a big hit today after reporting quarterly results yesterday. Even at $450, I would continue to be cautious and stay on the sideline. If it hits near $400, I will most likely initiate a position, but as I mentioned before this stock does not have huge upside. So, it makes sense to be cautious. 

General Motors (GM)

General Motors is one of Greenlight’s top holdings. He is still bullish on GM even after the recent run up. I agree and am still long GM. It has multiple catalysts:

  • Buy back even more of its shares from the government. They already bought back 11% which should increase eps.
  • Lower pension risks further. It announced last year that Prudential would administer and pay $26 billion of its pension obligations at a cost of $3.5 to $4.5 billion to the company. It can use the excess capital to move more of its pension obligations to Prudential.
  • United States vehicle sales return to a more normalized level as the economy picks up.
  • Europe economy picks up.

Marvell Technology (MRVL)

Marvell used to be one of Greenlight’s top holdings. However, the stock has been one of his worst performers. Earnings and revenue have been down. Recently, a jury awarded Carnegie Mellon University (my alma mater) $1 billion for patent infringement. Einhorn thinks that award will be reduced and the market is also discounting a new product cycle. 

I am avoiding Marvell because I am not confident that the patent infringement award will be reduced and do not understand its products well enough to make an investment.

Vodafone (VOD)

Vodafone is by far the most interesting of Einhorn’s stock picks. According to Einhorn:

  • It pays a 7% dividend.
  • It owns 45% of Verizon Wireless.
  • It trades at 12 times cash earnings excluding the Verizon Wireless ownership.

This definitely seems like a great investment. I will look more into Vodafone this weekend and share my findings.

Here is the letter.

Disclosure: I am long GM.