Given Thursday’s events, before dinner and my trip beginning Sunday, I thought I would post some commentary. Facebook’s (FB) stellar quarterly earnings report and resultant stock price surge helped to undo some of the damage from Apple’s (AAPL) post earnings sell-off. I thought the reaction to Apple’s earnings was a bit too shortsighted as I discussed the other day, but sometimes you have to endure short term pain in this business. Its knowing not to give up that is the key.
All was well until Carl Icahn, corporate raider and activist investor, on CNBC, at around 2PM, said that he had completely sold out of his AAPL position. He was for several years, a large shareholder and instrumental in getting the CEO and Board of Directors to institute a dividend and stock repurchase. Once he made his announcement, the stock market, especially technology / growth stocks went into freefall. Of course, traders extrapolated Icahn’s actions to the rest of the market and a full-fledged panic ensued. Rational? No. Scary? Somewhat. Disheartening? Absolutely, especially as the month was drawing to a close. I am overweight AAPL and growth technology and so the past few days have hurt.
So what was Icahn’s motivation? Let’s analyze the situation.
To begin with, about a year ago, Icahn touted AAPL stock as having a valuation of $240. Now all of a sudden, he was selling it out, at let’s say $100, implying that it was fully valued or overvalued at that price. His reason for selling the stock was his uneasiness with the Chinese market. Now I have been in this business over 30 years. I understand changing one’s analysis of a stock and modifying a price target. However, to reduce your price target by 60% would mean that you expect a massive decline in sales and demand for the company’s products. That is a bit of a stretch from my perspective.
On closer inspection, I have a theory. I believe that Icahn did not want out of AAPL stock. Rather he had to get out. His namesake company, Icahn Enterprises (IEP) has declined by about 1/3 from its high last year. The company is highly leveraged, as are most hedge funds and corporate raiders. He no doubt in my mind was trying to raise cash. AAPL was his most liquid position and was likely the logical choice to raise cash. He was likely rebuffed by AAPL management when asking that they repurchase his stake in the company. So, he liquidated shares in the market. The stock was under pressure for some time, so it must have been his footprints all over the stock’s decline, prior to or just after earnings were released.
AAPL closed at $94.83 after the dust had settled. The company has about $27.6 in net cash per share, as of the end of March, and growing. That is about 30% of the stock price. If you back the cash out, then that leaves about $67 in net assets ex-cash, or income producing assets. Using consensus estimates of $8.44, the stock sells for about 8 times earnings. By any measure, that is dirt cheap. Now you know why I am overweight AAPL. When will it get to $240, I can’t say. However, after the iPhone 7 release, it could easily get to its old high of $132.97 or more.
Then after hours, other key tech companies announced earnings. Amazon (AMZN), as FB did the prior day, surpassed expectations by a country mile. That stock surged over 10% after hours. LinkdIn (LNKD) also reported stellar results and that stock rallied. Priceline.com (PCLN) surged as well after a competitor reported strong results. By the way, PCLN stock got hit hard earlier on Thursday after the CEO was let go for having a sexual relationship with another employee.
Can those three earnings results carry the day? I am not sure. They should, but there will be plenty of people; who in this business we refer to as weak holders; still in panic mode. We will have to take a few body blows now knowing full well in the longer term, Icahn will be proven wrong with his sale.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL AMZN, FB & PCLN— although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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