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Carl Icahn Spells the End of an Era at Apple

This afternoon came news via a simple 140 space statement that Carl Icahn currently had “a large position” in Apple (AAPL).

By all accounts his discussion with CEO Tim Cook were cordial. Icahn himself, in another 140 space blast referred to it as “nice,” and he anticipated speaking to Cook again shortly.

I currently own Apple shares that somewhat surprisingly weren’t assigned away from me last week in an effort to grab the dividend. Considering that shares were trading at about $465 prior to the ex-dividend and the strike price sold was $450, my expectation had been that assignment was a certainty. Especially since option premiums were no longer showing any time premium with such a deep in the money option.

But as many know when it comes to Apple stock, rational thought isn’t always a hallmark of ownership.

I still think back to a comment made to an earlier Seeking Alpha article I had written in May 2012, when Apple was trading at about $575

“I guess it’s hard to not have a certain bias towards a company that has turned $30,000 of your dollars into $600,000 and may if things go right turn it into a $1,000,000.”

I always wondered whether that individual had taken interim profits or whether subsequent to May 2012 had secured some profits as Apple dropped some 200 points. The fact that its author was a CPA wasn’t lost upon me.

At the time, I thought that an investing strategy of hoping to turn $30,000 into $1,000,000 was irrational, just as turning $600,000 into $1,00,00 was irrational.

What was abundantly clear, as I took a cynical view of Apple shares in repeated articles when analysts were calling for a $1,000 stock price was that emotion was at work among many investors. Part of the emotion was the fervent belief that Apple could only keep innovating and would always be an aspirational product with great margins.

However, one refrain that repeatedly was played was that Apple shares were destined to go much higher, based on an absurdly low price to earnings ratio.

The contention was that one the market starting placing a value on Apple shares more consistent with other technology stocks, Apple would soar far above its current level.

Of course, the seemingly rational analysis dismissed the fact that the market may in fact, have been rational in giving Apple a P/E in the 12 range, just like any well regarded retailer.

A retailer? Apple is a retailer and not a technology company? Granted, it is no longer “Apple Computer,” but why should Apple be considered anything but a technology company?

That’s where Carl Icahn comes in.

Despite his recent foray into Dell Computer (DELL), his history as an activist shareholder has not included many companies in the technology arena.

Icahn refers to Apple as being “undervalued” but he isn’t looking at a low P/E to buttress his opinion. He is looking at a continuing large cash position that he envisions as a means of expanding the already large share buyback, that to many has already been the source of Apple strength going from its near term lows to $450.

This is not a case of finding fault with leadership, this is not a case of someone seeking to prevent shareholders from being robbed blind in an insider buyout deal. Apple is very different from Dell in so many ways.

This is all about leveraging cash, without regard to product pipeline and without regard to product margins. This isn’t about cutting expenses or changing direction. It is as pure as you can get – it is about cash.

Icahn cares nothing about this company other than for the cash it holds. Cash which is unleveraged isn’t worth very much to him or anyone else. It certainly adds nothing to a company’s P/E.

Icahn cares nothing about this company other than for the cash it holds. Cash which is unleveraged isn’t worth very much to him or anyone else. It certainly adds nothing to a company’s P/E. It’s time to face the fact that the stock market has been entirely rational in assigning Apple the P/E it has for these past years. It was not going to ever be considered a technology company again. It is a retailer with a narrow range of products which are bought at the whims of a fickle consumer.

While not terribly different from David Einhorn’s earlier attempt to wiggle cash out of the Apple coffers, Icahn is relentless and scrappy. What starts as perhaps a nice discussion can quickly go elsewhere.

While there is a quick pop in Apple shares in the aftermath of the announcement and while I anticipate shares to move even higher, this is the end for the Apple that you knew and loved. It wasn’t the death of Steve Jobs, but rather the indirect impact of his absence that spells the end, as Apple becomes like so many other companies simply nothing more than a vessel for someone that will have as limited interest as a pedestrian day trader.

While I’ve believed that Apple was an eminently good trading stock once in went down below the $450 level in February 2013, I think that in the very near term its suitability as a trade is even further enhanced, despite the large move higher this afternoon.

In fact, in the case of Apple, I would even co
nsider the rare decision to purchase shares without immediate and concomitant sale of call options.

As long as Carl Icahn is on your side, you may as well consider him in the same vein as those who warn that you should “never fight the Fed,”  even if you believe Apple is too large for even Carl Icahn to take on. That’s because this is now also a new era of cooperative behavior (against Bill Ackman, at least), where the big boys are capable of joining forces these days and will do so like vultures when there’s cash to be had.

The only caveat is that it’s not likely that you’ll enjoy dreams of turning $30,000 into a $1,000,00 and so I would be all for taking profits wherever they present themselves.

 

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Weekend Update – June 2, 2013

Who’s wagging who?

Anytime a major market goes down 7% it has to get your attention, but what seemed to set Japan off? Maybe it was just coincidental that earlier in the day across an ocean, the United States markets had just finished a trading session that was marked by a “Key Reversal,” ostensibly in response to some nuanced wording or interpretation of Federal Reserve Chairman Ben Bernanke’s words in testimony to a congressional committee.

The very next day we showed recovery, but since then it’s been an alternating current of ups and downs, with triple digit moves back in fashion. Intra-day reversals, as in their May 22, 2013 “Key Reversal” extreme have been commonplace in the past week after a long absence

Whether there is any historical correlation, direct or inverse between gold and our markets, gold has been experiencing the same kind of alternating gyrations and actually started really wagging a day before simple words got the better of our markets.

In the meantime, Japan clearly was the last to wag, but buried in the chart is the fact that in the after hours the Nikkei has had significant reversals of the day’s trading and it appears that our own markets have then taken their cues from the Nikkei futures.

 

 

 

It may have all started with a daily price fix in London and then it may have been fired up with mere words, but then having gone across the Pacific, it has all come back to our shores with great regularity and indecision.

For me, that is painting an increasing tenuous market and it has shown in individual stocks.

 

As a covered option seller, I do like alternating moves around a mean. I don’t really care what’s causing a stock to wag back and forth. In fact, doing so is an ideal situation, but more so when the moves aren’t too great and the time frames are short. Certainly the most recent activity has been occurring within short time frames, but the moves may presage something more calamitous or perhaps more fortuitous.

It’s hard to know which and it’s hard to be prepared for both.

Toward those ends I continue to have a sizeable cash position and continue to favor the sale of monthly contracts, but it can’t be all passive, otherwise there’s the risk of letting the world pass you by, so I continue to look for new investing opportunities, although I’ve been executing fewer weekly new positions than it generally takes to make me happy.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or the “PEE” category (see details).

I’ve been a fan of Dow Chemical (DOW) for a long time. It’s performance over the past year is a great example of how little a stock’s price has to change in order to derive great profit through the sale of call options and collecting dividends. It is one of those examples of how small, but regular movements round the mean can be a great friend to an investor. While I prefer assignment of my shares over rolling contracts over to the next time period, in this case, Dow Chemical goes ex-dividend at the very beginning of the July 2013 option cycle, thereby adding to the attraction.

I recently sold puts on Intuit (INTU) minutes before earnings were released, having waffled much the way our markets are doing, up until the last minute before the closing bell. Having had two precipitous falls in the weeks before earnings, there wasn’t much bad news left to digest and I was able to buy back puts the following morning, as shares went higher. June isn’t always a kind month to shares of Intuit, but it isn’t consistently a negative period. I think it has still enough stored bad will credit to offer it some stability this June.

Transocean (RIG) is just another of those stocks that’s part of the soap operas created when Carl Icahn puts a company in his cross-hairs. Having just re-initiated the dividend, Transocean has done an incredible job of maintaining value during the period when it ceased dividends and was still subject to lots of liability related to the Deepwater Horizon incident.

There’s nothing terribly exciting about Weyerhauser (WY). I currently own higher priced shares that have withstood the surprisingly low lumber futures thanks to a recent dividend and option premiums. As there is increasing evidence that the economy is growing there’s not too much reason to fear a continued slide in asset value.

Joy Global (JOY) reported earnings last week and I didn’t go along with last week’s suggestion that it would be a good earnings related trade, having also gone ex-divided. Although earnings weren’t stellar, some of the news from Joy Global was and indicated growth ahead, not just for its own operations, but in mining sectors and the economy. Shares seem to have been holding very well at the $55 level

Riverbed Technology (RVBD) is always on my mind for either a purchase or sale of puts in anticipation of a purchase at a lower price. Unfortunately, I don’t always listen to my mind, sometimes forgetting that Riverbed Technology has been a consistent champion of the covered call strategy over a five year period and was highlighted in one of the first articles I wrote for Seeking Alpha, which includes a delightful picture at the end of the article.

Coach (COH) is another of my perennial holdings, however, it was most recently lost to assignment at a substantially lower price, following good earnings. Despite the higher price, it is in the range that I originally initiated purchases and also goes ex-dividend this week. What gives it additional appeal is that now weekly options are available for sale.

Baxter International (BAX) also goes ex-dividend this week and like so many in the health care sector has performed very nicely this year. It recently responded very well to the adverse news related to one of its drugs in the United Kingdom and otherwise has very little putting it a great risk for adverse news. Being currently under-invested in the healthcare sector I’d like to add something to the portfolio and Baxter seems to have low risk at a time that I’m increasingly risk adverse.

Coca Cola Enterprises (CCE) is a stock that I have never owned, despite having considered doing so ever since its IPO, which was more years ago than I care to divulge. It is down approximately 5% from its recent high and appears to have support about $2 lower than its current price. I think that it can withstand any tumult in the overall market with its option premium and dividend offering some degree of comfort in the event of a downturn.

Although, I currently own shares of Williams Companies (WMB) and am uncertain as to whether I will add shares, as I’m over-invested in the energy sector and may favor Transocean to Williams. However, it too, offers a dividend this week and shares seem to be very comfortable at t its current level, which is about 7% lower than its April 2013 high point.

Finally, the lone earnings related trade of the week is Navistar (NAV), now back from the pink sheet dead. Mindful that its last earnings report saw a 50% rise in share price, you can’t completely dismiss a similar move to the downside in the event of a disappointment in earnings or guidance. However, recent reports from Caterpillar (CAT), Cummins Engine (CMI), Joy Global and others suggests that there won’t be horrible news, although you can never predict how the market will react or what other factors may drag an innocent company along for a ride. In Navistar’s case, the weekly futures imply about a 7% move. In the meantime, the sale of a put at a strike price 10% below the current price could provide a 1% ROI. NAy more than that loss and you should be prepared to add Navistar shares to your portfolio and hopefully you’ll enjoy the ride.

Traditional Stocks: Dow Chemical, Intuit, Transocean, Weyerhauser

Momentum Stocks: Joy Global, Riverbed Technology

Double Dip Dividend: Baxter International (ex-div 6/5), Coach (ex-div 6/5), Coca Cola Enterprises (ex-div 6/5), Williams Companies (ex-div 6/5)

Premiums Enhanced by Earnings: Navistar (6/6 AM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

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Diversification 101 Redux

I received an email this morning from a subscriber. He is well known to me in that he communicates with frequency and is very constructive in comments and observations. He also has good insights and asks very good questions.

So when I received and then read his email early in the morning following a 200 point decline in the market the day before, most of which came in the final hour, I was already concerned about market direction, recent losses in the OTP portfolio and losses in my own portfolio.

To put a little perspective on the specific period of time, I had just written an article earlier in the week expressing concern that we were heading for a market drop similar to that seen in 2012. I reiterated that concern and the potential need to increase cash positions the next week in one of the Daily Market Updates.”

He was asking about his paper losses of the last two weeks. Those losses were well in excess of what I and the portfolio encountered, (not considering the 50 or so positions that have already been profitably closed in 2013.)

As it would turn out, after he graciously shared some information with me, approximately 30% of his portfolio was concentrated in 5 positions. Four of those were in “metals” and another in “energy.” What they had in common, much more importantly is that all had suffered large losses in recent weeks, even beyond what the market itself had suffered.

With that information it was easy to diagnose the problem. Diversification had been breached.

The very first blog I ever wrote was entitled “Diversification 101” back in 2007. It wasn’t really about a classic discussion of diversification, as I never seem to get involved in those, but it was an extension of the concept of portfolio diversification. Ultimately, it’s all about the management of risk and reducing risk exposure.

By its nature, the act of selling options is already an expression of desiring to manage risk, but it’s not sufficient.

Let’s get basic.

There are essentially 10 or 11 sectors, depending on who is doing the counting. I rarely invest in the Utility sector, but pretty much everything else is fair game.

In a diversified portfolio you would have each sector in which you invest represent an equivalent percentage in your portfolio. For example, if your portfolio currently invests in 7 sectors, each should approximately represent 14% of your total portfolio.In a week, you may be in 6 sectors, eight or still at 7 and the representative proportions change accordingly.

Obviously, the bigger the portfolio the easier it is to be diversified, but large portfolios can also get confusing and unwieldly. It can be easy to lose track of precisely what families of companies you own when you have 20 or more stock positions.

Diversification on the basis of “sector” is a good place to start, but there’s lots more that needs to be done. Within each sector, the component stocks should be reasonably well distributed, recognizing of course that prices do change and the allocations will likewise be altered. Three stocks in a sector? Each should represent approximately one-third for that sector.

Beyond that, there may be rules for individual stocks as well, that comprise the sector. For example, a stock that is particularly volatile may be more appropriately owned at less than what may be the proportionate level.

For example, if you own stocks in a particular sector that is comprised of 5 stocks, within that sector each stock would be expected to comprise 20% of that sector. However, a more risky stock, as is usually designated as “MOMENTUM” in OTP trading alerts may warrant only a 10% position, or even less, depending on one’s individual taste for risk.

That reduced position is further diluted in a portfolio that consists of mutiple sectors.

When it comes to assembling a portfolio that is likely to change with great frequency particular attention has to be placed on monitoring diversification. To start, very often stocks that are assigned are parts of out-performing sectors. They, and their sector mates may be inappropriate to immediately add back to the portfolio because of their inflated prices. As a result, new purchases may then be in other sectors, inflating their relative proportions in your portfolio.

Additionally, very often when shares have fallen in price there is reason to consider adding additional shares as a means to erode paper losses by selling in the money calls on the new lot of shares. But by making those stock purchases you are adding to that particular sector and must do so with an eye both on the sector’s contribution to your overall portfolio as well as the individual stock’s contribution to the sector. Sometimes you feel as if you should turn a blind eye to the need for diversification because the downbeaten or under-performing shares may seem to be such bargains.

For example, I am currently unwilling to add shares of INTC or PBR because they are at their limits for their relative roles in my portfolio based upon their absolute values. If I buy more of either, despite what appear to be very appealing prices, I willl simply own too much of their shares.

In the case of CLF I’m not likely to add shares based on how great of a role I want a speculative stock, such as it is, to play in my portfolio. My CLF shares may not be of the same value as those of INTC or PBR, but I own enough “MOMENTUM” shares across all sectors. Now, especially during an unforgiving market, is not the time to stock up on volatile stocks.

One shortcoming of the methodology that I use to report ROI for Option to Profit subscribers is that there is an underlying assumption that each position is equally weighted in the OTP portfolio. In my real life trading, that isn’t the case as I try to stay within the distribution guidelines based on sector and individual
stocks. In general, I spend less on initial purchases of speculative positions than I do for more “TRADITIONAL” positions.

What’s important is to resist the enticement of the premium. The risky positions will offer a greater ROI, but you can work backward to determine how many shares of such a position to purchase. For example, if you purchased 400 shares of MetLife, a “TRADITIONAL” stock and received a net premium of $0.35, how many shares of Cliffs Natural Resources would you have to buy to generate the same net $140 in option premiums?

To answer my own question, using today’s data as an example, a $13,880 purchase of MET would net, after assignment the same as a $5,200 purchase of CLF.

Remember, it’s not about “Greed,” but rather about protecting your portfolio and having it work for you and creating additional income streams.

Although Option to Profit can report sector distribution to track diversification efforts, doing so is fairly unhelpful. It is inadequate for the individual, whose portfolio may be weighted very differently.

As a general rule, each person should define for themselves, for example, what proportion of their portolio do they want invested in “MOMENTUM” stocks? Those are the kind with greater premiums, but come with greater volatility and, therefore risk.

After that, investors should keep an eye on their diversification by sector. It needn’t be precise, but you should have an overall idea, based on value of underlying shares, what kind of exposure you have to each sector. In a typical market, you’ll see under-performance in sectors on a rotating basis, which is made palatable by out-performance in other sectors. In time, the under-performers typically become out-performers, although individual stocks may lag.

The importance of having an idea of your general exposure is related to taking action on Trading Alerts.

If an alert is made for a stock in a particular sector in which you are already fully represented, or perhaps even overweight, then you would likely not want to consider taking the risk of over-exposure. Additionally, if the individual stock has a risk profile that is great, such as a “MOMENTUM” stock, you would want to consider whether within the particular sector you already have sufficient risk exposure.

Ultimately, there will be times that you wished you had been overweight in a particular stock or sector. Although I’m not a gratuitously betting person, I am willing to bet that more often than not, you’ll end up being glad you had your assets spread out and diffused the risk.

Diversification is one of those things that really works over the long term. If you want to stay in the game don’t test the odds.