A Bear's case against Apple

2005 was spectacular for Apple (symbol:AAPL). The iPod just rocks. With the runaway success of the iPod, Apple stock has skyrocketed about 225% in 2005. I myself adore the iPod. I have gifted 4 iPods until now and plan to buy one for me soon.

But, how long will the iPod boom long? Anybody can guess it won't be forever. I feel that should happen in 2006 itself!

The way I see it is - the iPod is nothing but a sleekly designed pocket accessory for playing music. To me it is just amazing that nobody else could deliver a device which is at least equivalent if not better than the iPod. After all it is just a simple MP3 player. One day - and I feel not so distant in the future - the iPod will have a daunting competitor. And perhaps so much so that it may threaten to wipe it out altoghether. And I don't mean that somebody has to come out with a better iPod. It may as well be a different technology altogether. You know how LPs were replaced by audio tapes, which were replaced by CDs, which now are getting replaced by the mp3 players. I predict that unfortunately the iPod is probably going to meet the same fate. You can argue that the iPod is still in it's early stages of popularity. And maybe you are right. But I feel today technology is changing extremely fast and product lifecycles have shrunk significantly.

This is just one aspect of it. From a different perspective, the iPod (brand) will itself age. Today everybody wants to own it and gift it. But eventually people will get bored from it. Today it is the thing to buy. One day it will be anything but it. With a lot of iPods around, it will no longer have it's appeal however beautiful it looks. It will soon fall out of favor. Did you see what happened to Nokia phones? They were once the hottest cellphones around. But then they went out of favor and today Nokia has completely lost it's edge. Nokia phones are just like any other phones. That's what happens with everything however good it may be. Will Apple itself have the alternative for it's iPods? It's not unlikely, but I don't feel it's going to happen.

Plus Apple is currently demanding a lot of premium for the iPod. The iPod has a 100% premium w.r.t an equivalent (in terms of functionality) alternative today. No doubt that the iPods are unique and no other product can match them in terms of design and asthetics. But then people will not like to pay that premium forever. So Apple should see peaking of sales or reduced margins eventually. That will hurt profits.

Hey but Apple has a seemingly unending product line all set for the next year. What about iPod cellphones, video blogging, vast video content accessible on the video iPod, faster macs on intel chips?
Yes, some of these may help extend the iPod life span (in terms of product cycle). But they themselves do not look like blockbusters like the iPod itself. If you buy an iPod cellphone would you like to again buy an iPod? So that would be complementary. So the iPod cellphones will eat into the iPod growth. What do I care if a mac has a PowerPC chip or an Intel chip, so long as it works fine. So to me as a consumer that is irrelevent. The switch is a strategic decision for Apple and I don't think there will be a big positive impact for Apple. It may end up having a negative impact if the switch over does not happen smoothly - at least in the near term.

So how should you play Apple? For now I am an Apple bear. I may be wrong to determine, this soon, that the iPod mania is over. Apple is still a great company with great products and they may come out with other products and services that may propel their growth. But I am skeptical about that. I am betting against Apple. I feel it is a good short candidate (I have already shorted it). Please note that there is no imminent threat to Apple as of now. My analysis tells me that the technicals for the stock have been deteriorating (past 2 weeks). A lot of analysts have put a hold on the stock. And as I have mentioned above, my thesis says that there is no significant upside to the stock after this huge runup. If anything, there may be a downside. And I am betting on that. For me right now it just looks like a trade. I intend to cover-up my position if the stock drops to the low 60s.

Stay Tuned!

Bullish on India

I am extremely positive on India. The Indian stock market is on the run and is surfing new territory recently. It is still going strong and, I believe, poised to go a lot further. Because India is growing at about 8-9% in GDP for the past few years and is predicted to grow as much as 10% in 2006. Think about China in the early 1990s. The BSE (Bombay Stock Exchange) Sensex closed at 9290 yesterday. I feel it could skyrocket above 15000 by the end of this decade. That would mean about 10% gain for the next 4 years, considering a close of about 9300 for the year.

I myself made quite a few bucks investing in Indian ADRs in 2005. Here is a list of some of the Indian plays that I feel might be quite rewarding.

HDB - HDFC Bank
IBN - ICICI Bank
INFY - Infosys
SAY - Satyam Computer Services
PTI - Patni Computer Systems
REDF - Rediff.com
SIFY - Satyam Infoway
RDY - Dr. Reddy's Labs
CTSH - Cognizant Technology Solutions

If you are scared to bank on a single stock you can buy a fund that invests in a bunch of Indian blue chip stocks.

IIF - Morgan Stanley India Investment Fund
IFN - India Fund, Inc

Although I am very bullish, it would not be a great idea to jump in them blindly. One can wait for a midterm correction to board the bus.

Note: Please do your research before buying. Disclaimer.

Cramer and Google

Did you watch Cramer's Mad Money today? He did a recap for the year and showed (mostly) his good calls and a few bad ones. And he just went crazy over GOOG. Man! the guy had screamed for Google right from February (Buy Buy Buy). And he couldn't have shouted more. I am absolutely with him on that one. That was his best call of 2005 and he fully deserves credit.
Bytheway, I had got in Google when it was below $200. And that was NOT on Cramer's recommendation. I didn't even know Mad Money at the time. Okay enough of my boasting. Why did I buy Google that time? One simple but strong reason - I beleived in the company! I have to admit that I had no freaking idea they would do so well - within a year. The max I was expecting out of them was a 50% return. Well they gave me a 100% - thank you guys. I should also acknowledge here that Anthony Noto's (analyst at Goldman Sachs who covers Google) bullish calls about Google were also another driving factor for me to get in the stock.

So what do you do from here? What if you have been just waiting and waiting as it has zoomed almost 5 times from it's IPO? I feel that this company is like a one in lifetime opportunity. And it has yet to run it's full course. There will definitely be ups and downs, where you may feel you are going through a wild ride. Your success (or failure) will depend on how hard you can cling to it. I wouldn't be surprised to see the stock cross the $1000 mark in the next 5 years. Please - don't take it as my price target. It is just my guess.

We can do some calculation here. Average 06 Estimate is $8.6. The friday's closing price of 430 yields us a forward P/E of 50. So taking the same 50 multiple in order for the price to go to 1000, Google will have to earn $20 - about 2.3 times it's estimated earnings in 2006. To put this in growth perspective, Google will have to grow about 50% for the next 3 years and still have a good momentum at that time (for people to pay a 50 multiple at that time) for it to break 1000. Would it be able to do that - hey it is quite possible looking at their explosive growth for the past couple of years! So now you decide.

Should you buy it today? Hmmm that is a completely different question. If you are patient and can take wild rides then surely you can. Otherwise if you are patient in another sense just wait a bit. We will be entering a tech sluggish period soon (February end to July) and you can get some opportunity to get in. Choice is yours. Happy Googling!

Just another note: In the show Cramer mentioned that he flip-flopped on some of the stocks (was a bear earlier and then become a bull - WMT for example) and he said you need to be FLEXIBLE in this game. Read my previous post where I have mentioned exactly that - just a coincidence!

How I Trade

What methodology do I follow?

This is a very tough question. What methodology do I follow? For me it is best done than said! When somebody asked this question to me for the first time I was caught on the spot. I follow an empirical method to investing. I do have some principles that I try to follow. After doing a lot of trading and analysing my trades I have found that there are some things that if I try to adhere to in general, I remain in good shape, whatever happens to the market. And these become my priciples. Here are some.

Be flexible.

Have a compelling reason when you enter a trade.

Try to have a macro picture.

Analyse your trades and learn from mistakes.

Understand your psychology and capatilize on your strengths supressing your weaknesses.

Have patience.

Limit your losses, grab your gains (don't be too optimistic).

I can go on and on... There are so many. If I keep on thinking, it may go endless. Of course these things are quite easy to say, but I know they are difficult to adhere to. How effectively you can control your mind, will eventually dictate how successful you become. What I have learnt is that everybody has a different psychology and comfort level. As mentioned in Alexandar Alder's book Trading for a Living the beast is in your head. You need to understand how your brain works and adapt.

What kind of investor am I?

I am an equity investor. I have (at least for now) only invested in equities (only on the US stock exchanges). I have not done options, bonds, tresuries or currencies trading. I also do not invest in Mutual Funds (hey I am young and I want to do it myself, why do I get in somebody's boat). I do not do day trading. In more than 4 years that I have traded, there was only one instance where I bought and sold a stock on the same day. In stocks I go long as well as short (this I have started pretty recently). Actually really speaking eventually I intend to do the whole gamut of this. But for now I will be sticking to stocks only.

To elaborate a little bit, I do not have any specific rules as to which stocks I buy. Small caps, Mid caps, Large caps, Blue chips, cheap stocks under $5, expensive ones above $400 (you know this one!) all are ok - as long as the company makes my cut. And how does a company make my cut? Hmmm, that is interesting. There is not single source or specific way that I start following a company. Usually it starts with me reading an interesting article, review somewhere on the Internet. Or say somebody like Cramer (our Mad Money guy) would recommend it. Or a company is featured in say IBD (Investors Business Daily). But this is just the start. It takes a while before I decide to do anything with the stock.

How do I select a stock?

I rely a lot on analysts (the guys who research companies) and their recommendation to get a sense of a company and it's valuation. I am not an economics grad and am trying to learn the trade. So I (at least for now) do not know how to value a company properly. My best option is to look at different analyst research reports (whichever I can get access to). My brokerage firm TD Waterhouse gives me access to a variety of research reports from Goldman Sachs, S&P, Argus etc. I also look at First Call ratings and estimates from Yahoo Finance. Investors Business Daily ratings also give a good perspective about how a stock is doing. If I like what I see and read then the stock comes in my list. Then I start following the stock. Many of the stocks that are in my list currently, I have been following them for at least more than 6 months, and some years. That means I have gone through multiple of their earnings cycle. That does not mean that I was holding the stock all the time. All this observation gives me kind of sense of what to expect from the stock, short term, mid term and long term. I can make my trades more confidently. It allows me to factor in the risk of my trades and being comfortable with my trades.

Stay tuned!

Audience

Anybody who is interested in investing, trading, markets, stocks etc. I strongly feel that small investors who do their independant research and trade online will find my blog interesting. (I myself fit in that category).

Contact

If you have any comments, suggestions, opinions about this blog or views expressed in this blog feel free to email me at smartinvestingblog@gmail.com. Thank you.

Why this blog?

I have been thinking of starting a blog for quite sometime now. There are several reasons that I have in mind.

1. To keep my thought trail and (later) analyse my predictions/decisions.
2. To easily share my ideas with other like minded friends and get feedback from them.
3. To build a community of people like you and me, forming a synergetic relation in which everyone would be benefited.

Information is power and with sharing of information we should be able to achieve better results.

What I intend to write in the blog?

I have just started. I have yet to formalize on the pattern of my blog. I am sure it will evolve pretty soon. For now I intend to start commentary on

1. Stocks that are my favourites. Since I follow these stocks quite closely I will have definitely something to say about them.
2. Market sentiment and direction
3. Specific industries or sectors on which I may have some insights
4. Anything related to the market that I feel would be interesting to you as a reader
5. If readers of my blog have any suggestions those are very much welcome


ATTENTION: Before you start following my blog please read my disclaimer. Believe me, I don't want to scare you with that, but legally I am obligated to clarify myself. Thank you for doing that in advance.

Disclaimer

Follow this blog at your own risk. The thoughts mentioned here are simply the author's opinions and provided for discussion purposes only. The author is not liable in any way for actions taken by you on the basis of information provided in the blog. The author of the blog is not liable for any damages (financial or non financial) that may occur to you in the context of following the information presented in the blog.

About

This is Atul (real name). Adk are my initials. Welcome to my blog. I am a software engineer by profession. I do stock trading as a hobby/side business/adventure. I just love trading and am facinated by it. For me to research a stock, judge it, risk my money in it and get rewarded (or sometimes smashed) is just very thrilling. I am (blatently) confident that I can do it successfully (no, I don't think I am foolish). I admit, I am learning and also know I will have to keep on doing it endlessly (I will never get perfect at it). But I am OK with that. I just have to keep on getting good at it - that is my goal. I needn't worry about the rest. So that is what drives me to this game. And I intend to keep on playing it my whole life (at least as of now!)

If you like this then keep on following me (I mean my blog). I hope you enjoy the ride with me. Hail the Markets.