Short sell Apple (AAPL)? Wouldn’t that be the greatest short in the history of shorts?
It isn’t hard to find famous money managers buzzing about this idea. Jim Chanos, who made his fame shorting Enron and who is a huge China bear, tells Bloomberg TV “we’re getting afraid of heights” in Apple stock. Jeff Gundlach, the bond guru at DoubleLine capital, started talking up short sell Apple earlier this year:
“If I were one of these crazy hedge fund guys, with the slick haircuts and fancy shoes and racing stripe shirts, the trade I’d put on is 10-times-leveraged natural gas long versus 10-times short Apple.”
As passive investors, we would never encourage leverage or taking short positions on anything — or even taking part in active trading at all — but a simple examination of the Apple timeline tells a pretty interesting story.
The stock is rumored to be headed toward $1 trillion market cap territory. Money managers have relied on its meteoric rise to pad their performance. By market cap, Apple recently was worth more than ExxonMobil (XOM), more than IBM (IBM), more than Walmart (WMT), GE (GE), PetroChina (PTR), or Microsoft (MSFT).
Apple stock poked its head above $700 a share recently before falling back. Incredibly, you could have bought Apple stock in mid-2003 for under $10 a share. That performance, however, neatly lines up with the tenure of the late Steve Jobs.
In 2000, Jobs was still “interim” CEO, having returned after several years of exile to the company he famously founded in a Silicon Valley garage with a high school buddy, Steve Wozniak, in 1976.
In 2001, Jobs sold the first iPod. In 2003 — about the time the stock began its climb — iTunes opened for business and the operating system OS X was launched. Then it just explodes from there: iPhones, iPads, various iterations of the laptop and desktop franchises, and so forth. While competitors such as Hewlett-Packard (HPQ) and Dell (DELL) went after corporate business, Jobs aimed straight for the high-end consumer.
Almost a year ago, Jobs died at 56. Nobody was surprised by this. Jobs had been sick for some time, although he worked quite hard to hide his illness and its seriousness. Apple insider Tim Cook took over as CEO and the iPhone 5 launched to great success, although Cook’s big debut was marred by a decision to use homegrown mapping software not quite up to Jobs’ exacting standards.
And here we are: Apple is trading at about 15.59 price-to-earnings, just under the S&P 500 at 16.67. Short sell Apple while it trades below the market P/E? Does that make sense?
The problem for active money managers now is how to “guess right” something that is absolutely unguessable. Will Tim Cook be as good or better an innovator as Jobs? Would anybody?
Will investors panic out of the stock today, tomorrow, next quarter? Never? The iPhone 5 sold through the roof the first weekend, but analysts are howling for more. At some point, no result will be good enough for a skittish fund manager. Good news could turn into a rapidly devaluing commodity. The short sell Apple argument would gain ground.
Nevertheless, Apple’s P/E ratio is in line with the broad market. If you thought the company was a winner a year ago, valuation suggests you were right to stay in. You could still be right a year from now. If you were to consider the short sell Apple play, it might bite you back, and hard.
The passive investor, meanwhile, is way ahead of the supposed “greatest short of all time.” Part of the reason that many index funds are higher today is that they bought and held Apple all along.
That’s because many index funds and ETFs are weighted by market cap. As a stock rises, it becomes more of the fund’s holdings. Apple is the top holding today of some big passive funds. For instance, it was 3.6% of the Vanguard Total Stock Market ETF (VTI) at the end of June.
Over the years since 2003, periodic rebalancing had the effect of taking out cash as Apple drove ever higher. If it goes higher still, index funds still own it, of course. If it collapses in a heap and the short sell Apple play wins, that piece of the total pie remains relatively small.
The upside of the passive approach is less exciting, of course, but the downside on one stock in an index fund is minimized to almost no risk at all. Apple might crater, but it won’t take GE, Exxon, and Walmart with it.
That’s what passive investing is all about, in the end: Enjoying the fun and excitement of the rise while avoiding the inordinate — some would say crazy — risk of throwing the dice on a single stock. Even the greatest stocks can, and do, come down to earth.