Apple $1000: Why Doug Kass will miss the next 50% move
Posted on October 4, 2012 by Andy M. Zaky| 45 Comments
Ever since Apple unveiled the original iPhone back in 2007 there has yet to be a solitary launch of the device that hasn’t been wrought with some sort of controversy. That’s because the press would love nothing more than to see Apple fail. Even when there is no legitimate reason to criticize Apple, many will simply take a minor issue and blow it completely out of proportion in an effort to stir up controversy.
The same holds true when it comes to a growing group of very misguided and naive investors who fail to grasp the enormity of the market in which Apple operates. This results in Apple bears generally failing to understand why it is that Apple continues to push higher despite their premature top calls and delusional expectations for lower prices. Since the launch of the iPhone 5, all we’ve seen is one Apple bear after another stumbling over each other just to position themselves as the first to prematurely forecast the demise of Apple.
Doug Kass, an otherwise respectable fund manager and writer at thestreet.com, should know better. But he has more or less been a major leader pushing the bear case against Apple since early 2007 with his article entitled “Don’t Buy Apple’s One-Trick iPhone Pony“. At the time, he could have just bought the stock at $90. Apple has moved up 678% since that time.
Instead of embracing those 678% gains Apple has generated for its investors over the past few years however, Doug Kass has chosen to take the bear side of the trade for the same misguided reasons that every other Apple Fail Bear decides to do so. It’s because he actually knows very little to nothing about the company. And that is very clear from the commentary he has published over the past several years on Apple including his recent weak 10-bullet point argument for why Apple is topping yet again. You can read it here.
After he published this piece, he stated that in response to his bear case “it is not surprising that the hostile react-o-meter is spinning out of control. But I have yet to see a point-by-point refutation to my view on Apple.” While I’m not going to spend time on a point-by-point refutation of his argument, I will publish for the record why it is that Apple is going to $1000 a share by January 2014. To be honest, this article isn’t really about trying to convince anyone of anything. I already know what is going to transpire, and unlike Doug Kass, I will be capitalizing on that.
I want everyone to understand that this article is intended only to get this on the record so that when Apple is trading at $1000 a share this time next year, I will be sure to re-publish the article as a gloat against Uncle Dougie. So believe whatever you want to believe. This is just a “for the record” article.
But as I was saying, Doug Kass, like the average Apple bear, knows very little about Apple. That is why he has been essentially arguing to either sell it or short it since Apple was at $90 a share back in 2007. You see, if you ask the average Apple bear how large the smartphone market is, none would be able to give you even a semi-reasonable answer. In fact, not a solitary Apple bear can tell you anything about the smartphone market, how fast it is growing or how large it is. They may spout out that Android owns the majority of the platform market. But they couldn’t tell you much more beyond that.
Because if they did know anything about the smartphone market, not a single trader, analyst or member of the financial press would in their right mind advise anyone to sell the stock. Especially when it is trading at $90.00 a share in 2007 and again at $130 in 2009.
Yet, let’s talk about Doug Kass’s past record when it comes to Apple. After advising people not to buy Apple’s One-Trick iPhone Pony back in January 2007, he then advised people to avoid Apple in June 2009 when the stock was sitting at $130 a share. On October 12, 2011, Doug Kass called Apple and Gold the most crowded trade of 2011 implying that investors should stay away. At the time Apple was trading near $380 a share. The stock rose by about 70% just 6-months later. In February 2012 when Apple was sitting in the low $500′s, Kass states that “Apple Euphoria Has Blinded Tech Investors.” The stock rallied another 25% after that comment. Everyone else is blind but Doug Kass it seems.
So Kass has either called “the top” on Apple or has consistently advised to sell it since 2007. In June 2009, he dropped it from his “buy” list because he claimed it has become “fully priced” at $130 a share. Three years later, Apple has more in cash per share in its coffers than the level at which Kass believed Apple was fully priced. He has missed one of the easiest trades of the century. And like any investor who misses the move on a stock that they should have capitalized on, Kass reacts by consistently arguing that the stock is topping, overvalued or just driven by “euphoria.” Why? Because if it tops, he can at least save face. If it continues to go higher, then he continues to look like someone who has just missed the move.
But let’s get back to this issue of lacking knowledge about operating markets. Almost all Apple bears have the same two things in common. First, they are generally resentful that they missed the move in the stock and are trying to save face by now bashing it. Second, they have a very significant lack of knowledge of the markets in which Apple operates. They don’t have a grasp of the size of the smartphone market or the size of the tablet market or the size of the notebook and desktop market.
And as a result of this lack of knowledge, the average Apple bear will make the same comically absurd statements like those made by Joe Nocera from the New York Times last week in his article entitled, “Has Apple Peaked?” They don’t know anything about earnings, earnings growth, P/E compression and stability, the size of the smartphone market, revenue growth, Apple’s operating margins or how they are determined. Instead, they will keep things at the general level because the embarrassing truth is that they really only understand things at the mere general level.
They will attack Apple by pointing to the same general non-concrete concepts. Apple is topping because there is doubt that the company will be able to innovate without Steve Jobs. Apple is topping because Tim Cook has fumbled with Maps. Apple is topping because the company’s brand is losing its luster. Apple is topping because its products are losing its wow factor. Apple is topping because it won’t be able to withstand headwinds as a result of a slowdown in the global macroeconomic environment. It’s the same asinine reasons we’ve been hearing for years now. You heard it after the advent of the iPod and pretty much after each generation of the iPhone. You hear on every small pull-back and on every healthy 10% correction. You hear it anytime Apple launches a product and when the sun rises and sun sets. You hear it at $100, $200, $300, $400, $500, $600 and $700 a share and you will hear it at $800, $900, $1000 and $2000 a share.
But these arguments are entirely meaningless. They have been and will continue to distract investors from that which is really important. We have proven time and again without any shred of doubt that Apple’s stock price is dictated by technicals in the near-term and by its earnings growth in the long-term.
There is a reason why Bullish Cross has been able to forecast Apple’s stock price with a significant degree of accuracy one year after another where fund managers like Doug Kass have generally and objectively failed. The reason for our success and Doug Kass’s failure lies entirely in our ability to comprehend the the size of the smartphone market. And it helps that we’re not dumb enough to say that Apple has topped at $130 a share given that we knew that Apple would be sitting on that much in cash per share in just a few years.
Those who failed miserably at calling the top at $200, just simply did not understand this concept. Anyone who attempts to call the top on Apple right now, just simply doesn’t understand the company. Understanding the size and scope of Apple’s operating market is the key to understanding how far Apple will go. You are hearing it right now at Bullish Cross. Apple will not peak before it reaches $2000 a share. And that is a statement made with a complete understanding of the size and scope of the smartphone market, what that size will do for Apple’s earnings and the extremely cheap valuation that Apple would have to trade at in order to be at $2000 a share. It’s going to $2000 a share before the close of this decade.
But alas. Not everyone has the patience or wherewithal to spend even 1 hour analyzing Apple’s market. Because if they did, there would be far fewer Apple bears than there are today. And that is the very simple truth. Instead, it’s much easier to say, “oh the stock went up 100% last year, it must be topping” or “it must be fully priced.” “Apple’s market cap is $600 billion? It must be topping.” Because as well know no company in the future can be worth more than $600 billion.
And because Apple bears know very little about Apple the company, its earnings or its operating market, they all end up making the same exact foolish argument against the company. They all lodge the same murky argument of Apple’s lack of leadership in the absence of Steve Jobs, that the stock is a bubble because it has risen several hundred percent or that Apple’s shortcoming on maps suggests its brand is sinking. Then they go on to say that these issues will somehow lead to a slow down in sales of the iPhone. What they fail to understand is that Apple is a global growth engine that is still in the early stages of its expansion phase within a multi-trillion dollar industry. And it is penetrating that industry very deeply.
For example, ever since the Street.com writer Rocco Pendola published why he was selling his Apple shares at $340 a share, he has done nothing but make one generally poor bearish argument after another. He seems almost resentful that he prematurely sold his Apple and is now caught up in the same pointless attempt to call Apple’s top like Doug Kass is doing right now. All of his arguments are made at a very general level just like Doug Kass’s 10-bullet point piece.
For example, Rocco recently went on to CNBC last week to explain how Apple’s demise is almost assured as a result of what MappleGate says about Apple’s leadership. We’ve heard that argument hundreds of times already. But what does he have to say about the fact that Apple will probably earn $70 in EPS next year? And at a 15 P/E ratio, that puts the stock at a $1000 a share?
Like Doug Kass, Rocco Pendola would probably argue that Apple won’t earn $70 in EPS because iPhone 5 sales are going to slow as a result of a slowdown in the global macroeconomic environment, or as a result of MappleGate or as a result of some very obscure notion of a collapse in Apple’s brand hitting iPhone sales. We will get nothing real or concrete from either Rocco or Doug Kass.
Then we get the average Seeking Alpha investor-contributor who also just doesn’t know what the hell they are doing. For example, for every sensible article detailing the case for why Apple is headed to $400 a share when it’s at $200, you have 50 articles like this one published on November 29, 2011 entitled “The Apple Bubble is Ready to Burst” by Leonid Kanopka. Here’s how the article begins: “Like the Chinese economy, Apple has spiraled out of control for the past several years…the stock is currently trading in the upper $300′s and appears to be highly overvalued…” That’s when the stock was trading at $365 a share before it went on a 70% rally to $644 a few months later. This guy literally published this piece right at the bottom when Apple was ready to rally. Interestingly enough, the arguments made in this article are no different than the arguments made by many of the same Apple bears today including Doug Kass. Look at the bullet points in that piece: Apple is the largest market cap company. It has lost Steve Jobs. There is skepticism about whether Apple can innovate. The same arguments made at $200 and $300 a share last year and the year before that, are being made by the same average bear at $600 and $700 a share today.
Notice this article by Leonid Kanopka doesn’t outline a solitary earnings or valuation based reason for why he thinks the stock is a bubble and why it is ready to “burst.” I really love this piece because it really can be published at any time with any date by any author, and it is more or less consistent with the same bearish arguments we see against Apple today. But why have these arguments generally failed? Do any of these bears sit back and ask themselves this question? We will be publishing a piece detailing our full view for why Apple is headed to $1000 a share next year. Stay tuned.
