A few months back, Apple (AAPL) looked like a stock the investing experts may have been considering for a short opportunity. The stock’s run had increasingly looked unsustainable as the denominators of popular investing metrics–revenue or earnings–had ballooned.
So it appeared difficult for earnings growth to keep up, or for price-to earnings to really look like much of a floor. In my opinion, Apple as a stock has long been too popular for its own good. So when the chart began to break down, it looked like a falling knife. I didn’t short Apple because I’m far too humble to think I have special knowledge about the company. Likewise, I wouldn’t be buying it now, even if my best guess was that it was headed back up.
But I do think my discipline (primarily, closed-end funds) provides a unique context with which to consider the current “value” so many talking heads are portraying. Price to earnings ratios are a metric, and yes, Apple’s PE looks attractive, as it seems everybody and their brother has noted. Similarly, discounts to closed-end funds can look attractive when the overall merits to buying shares simply aren’t there.
For example, popular CEF portals display funds like Renn Global Entrepreneurs (RCG) and Foxby Corp (FXBY) trading below seventy cents per dollar of published Net Asset Value (“NAV”). I love to utilize closed-end funds in my investing, but do I currently own these? Absolutely not. I believe that perceptions of value are too often illusory.
My view is that such extreme discounts are often unique to funds with plentiful red flags. In contrast, Apple might be seen as a fallen star. So, for the purpose of my analogy I’ll observe some closed-end funds to which Mr. Market historically awarded a premium.
I first predicted a very bleak outlook for Alpine Total Dynamic Dividend Fund (AOD) nearly three years ago when it traded at more than a 30% premium to its NAV. Sadly, its shareholders skied off that cliff back in 2010 and then got crushed again in recent weeks. While in hindsight it never should have, AOD had once been believed by its shareholders to be a star.
Popularity among stocks, funds, or even investing styles can be a double-edged sword. I suspect the droves of loyal Apple shareholders will be adversely affected in cycles. Sure, the P/E ratio suggests a favorable valuation opportunity today. But the apparent opportunity could be illusory in my opinion. The earnings growth rate is clearly past its peak. The company’s favor among investors is also past its peak. The recent painful selloff in Apple may leave its bulls seeing illusions of a now-attractive price. Similarly, metrics like yield had AOD looking tempting after its first big drop. Those who jumped on board before the second cliff that AOD skied off in recent weeks had been so proud of its yield being (technically, and by virtue of dividend capture rotation trading) “earned.”
And now, even after its yield (and price) were dramatically cut again, the lower market price may have AOD looking tempting to those who don’t recognize a falling knife when they see it.
So when I look at the price of Apple, I see all sorts of ways in which AAPL shares could be depressed further in cycles. Management appears to be focusing on its size rather than on paying out its cash hoards to shareholders… as the former tech star’s earnings growth dwindles a la Microsoft (MSFT)… and yes, as the feedback loop affecting its popularity among mom and pop investors makes that Apple shine less and less.
Apple may be the latest, but it is certainly not the first example of a stock that was over-loved in our investing culture. I intend to stick with doing what is unpopular. My discipline is under-researched securities like closed-end funds. And no, I do not own AOD.
The investments discussed are held in client accounts as of Feb. 1. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
For more than 14 years I've focused my investing and research efforts on Closed-End Mutual Funds, called CEFs. They represent an alternative way to invest in stocks and bonds. CEFs frequently trade at a discount relative to the price of fund’s underlying portfolio, which I personally see as a way to own stocks and bonds at a discount to their underlying value.
I previously worked as a closed-end fund product specialist at Morgan Stanley. More recently, I provided independent closed-end fund research to institutional investors. I have written more than 50 articles regarding closed-end funds and am frequently quoted in the media.
My goal is to invest in funds that I believe offer a favorable mix of risk versus potential reward. I attempt to earn a profit when the gap between the market price and the net asset value of a fund narrows.