| | WHY I SOLD APPLE
By Tim Beyers (TMF Mile High)
The Motley Fool
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I own three Macs. My uncle owns two. My cousin, at least one
more. So steeped am I in the so-called Cult of Mac that I own a
black turtleneck. But I can no longer allow my portfolio to have
a position in Apple (Nasdaq: AAPL), thanks to CEO Steve Jobs.
ROTTEN? PERHAPS
My problem is best summed up by a blistering rebuke of Jobs
delivered by my Foolish friend and colleague Seth Jayson three
weeks ago. At the time, Seth wrote that Jobs and Apple's
management offered a too-little, too-late apology for gruesome
options backdating practices of which Jobs was aware, and which
appear to have transferred wealth from shareholders to members
of his executive team.
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Many posters to our Apple board disagreed with Seth's account. I
do not. Instead,
I think he's laid out a perfectly clear case for why Jobs, for
all his obvious talent, isn't a Foolish CEO of the caliber of
General Electric's (NYSE: GE) Jeff Immelt or Whole Foods'
(Nasdaq: WFMI) John Mackey.
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Foolish CEOs seek to enhance shareholder returns because, as
shareholders themselves, they're content to get rich right
alongside the rest of us owners. That's obviously not Jobs; he
owns slightly more than 1% of the company, according to the
latest proxy statement. Contrast that with his widely reviled
buddy in tech, Larry Ellison of Oracle (Nasdaq: ORCL), who owned
roughly 24% of the outstanding shares of his company as of
August.
TAKING EMOTION OUT OF THE EQUATION
But there's more than moral outrage at work here. Indeed, the
truth is I'm not really outraged at all. I sold my position in
Apple because Jobs' flimsy apology and the lack of real
consequences that came with it suggests that he and other Apple
executives are content to hold shareholders at arms' length.
It's as if he's pleading for us to simply trust him, and all
will be well. Someday.
Maybe he's right. Jobs has certainly earned the benefit of the
doubt when it comes to product design. But I'm not nearly as
sure of him when it comes to acting as the steward of billions
in shareholder capital. The stark, unemotional truth is that,
right now, we investors don't know everything there is to know
when evaluating the Mac maker. And that, in turn, increases the
risk of loss.
WHEN RISK BECOMES A THREAT
Risk alone isn't bad, of course. It's when the potential for
risk to be realized outweighs the potential rewards that
investors lose. I fear that the equation has finally gone
negative.
Consider the valuation of the shares. Apple is priced as though
it will grow earnings at roughly 28% annually for the next five
years. That's possible, of course; Jobs and his team managed
174% compound annual growth on the bottom line over the past
three years.
But current projections assume that Apple's recent earnings
reports are accurate. We already know that they aren't.
Management says so at the very outset of the latest financial
release: "These preliminary results may be subject to
significant adjustment as a result of a likely restatement of
historical results."
Isn't it impossible to produce a fair value for Apple under such
conditions? It would seem so to me.
THANKS, STEVE
I purchased January 2008 call options in June, at around the
time Apple's underlying shares were trading for $56 a stub. My
thinking was that concerns over competition were overblown by a
brutal summer downturn. The LEAPs allowed me to mitigate the
valuation risk that comes with a very high P/E. Plus, I believed
that if any of the catalysts I outlined here came to pass, I'd
be sitting on a multibagger.
http://www.fool.com/m.asp?i=2178474&u=12755744
My plan worked out even better than I had imagined. After just
three months, my position was up 120%, a gain for which I must
thank Jobs and his team. So, Steve, thanks.
But, of course, it was also your failure of oversight that
suddenly and egregiously increased my risk, forcing me to sell
and give up the potential for still-greater gains. Sour grapes,
you say? Maybe it is. But I've been in the market long enough to
know that investing on the blind, as I would now be with you, is
as reckless as it is stupid. I won't do it again.
So, yeah, thanks, Steve. Thanks a lot.
High tech. Biotech. Nanotech. Any tech. David Gardner and his
Foolish band of analysts cover it all for Motley Fool Rule
Breakers, and they've unearthed four multibagger stocks in two
years as a result. Want to find out what they are? Try the
service free for 30 days and find out. Whole Foods is a Stock
Advisor pick.
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Fool contributor Tim Beyers, ranked 1,330 out of 11,654 in
Motley Fool CAPS, is much more pleased with his MacBook Pro than
he is with Jobs' management. C'mon, Steve. You can do better.
Tim owns shares of Oracle. Get the skinny on all of the stocks
in Tim's portfolio by checking his Fool profile. The Motley
Fool's disclosure policy is always on the up-and-up.
mailto:MileHighFool@yahoo.com
http://www.fool.com/m.asp?i=2178477&u=12755744
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http://www.fool.com/m.asp?i=2178479&u=12755744
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| | Posted 11/5/2006 12:19 PM - 61 Views - 0 eProps - 0 comments
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