The Rant

There is a weekly paper in the small city where I live that covers all the local comings and goings. On the last page of the paper is a section called “The Rant.” 

Basically, it’s a place for people to unload about everything that pisses them off. People rant about everything from a lack of parking downtown to the person in front of them at Starbucks with their face buried in their phone when it’s time to order. 

“You, mid-20’s guy in a blue check shirt in front of me at Starbucks Wednesday morning around 8am. Stop playing Candy Crush on your iPhone, while listening to Nickelback and order your Double Ristretto Venti Half-Soy Nonfat Decaf Organic Chocolate Brownie Iced Vanilla Double-Shot Gingerbread Frappuccino. Some of us actually have to work for a living.” Over the course of last week, as I was digesting all of the stories about Apple’s (AAPL) earning announcement, I felt like I needed a good rant. 

Here it is, dear readers. 

An Apple a Day

I don’t do a lot of commentary about individual companies, mainly because I’m a global macro snob and I believe that understanding macroeconomic trends and catalysts is a far more worthy pursuit than being buried up to my elbows in 10-K filings and balance sheets. But I’m putting my bias aside for a week and diving into Wall Street’s love affair with Apple to shine a light on one of the many soft underbellies of the Street. 

Last Tuesday, Apple announced that it missed both earnings and sales estimates for Q1 2016. AAPL stock gapped down 8% from Tuesday’s closing price to Wednesday’s opening. Apple fell further on Thursday and Friday, all-in-all, declining 11.3% for the week. There have been a trillion (est.) articles written about Apple in the last 5 days, and I can promise this isn’t one of those articles. I’m embarking on a cautionary tale of what’s wrong with Wall Street and why you should tread very carefully if you are relying heavily on the Street for advice and guidance. 

They Don’t Know Preferred Stock from Livestock

The morning after Apple missed earnings, Goldman Sachs (GS) removed the stock from its “Conviction Buy” list. 

To start, if you’re getting stock ideas from the Goldman Sach’s Conviction Buy list then you deserve what you get. But I digress. Goldman Sachs is one of the largest firms in the world and has some of the smartest people working for them. I’d like to think that a conviction buy list would be a list of stocks that Goldman Sachs has special insight into and has the potential for outsized appreciation.

At the very least, it would be helpful if GS had enough insight into Apple’s business to have removed the stock from its precious list before AAPL dropped 8% in 18 hours, rather than after. But just so there was no confusion, GS made a point to say that while they removed Apple from the list, it was maintaining a “BUY” rating. 

I’m picking on GS but they aren’t alone, not by a long shot. There are currently 31 firms that carry a rating on AAPL stock. 22 of those analysts, have a “STRONG BUY” rating. Of the remaining 9 firms, there are 3 “BUY,” 5 “HOLD,” and 1 “SELL.”

It took us quite a lot of digging on the world wide web to actually find out which firm had the nerve to slap a “sell” on Apple. Our best guess is an analyst named Per Lindberg, for a Nordic investment bank named ABG Sundal Collier. Back in January, Mr. Lindberg put a price target of $65 a share on AAPL when it was trading at $98. Unfortunately, analysts with kahunas are as rare as the “sell” ratings themselves.

The problem with taking advice on individual companies from Wall Street firms are the HUGE conflicts of interest. Case in point, the day after Apple missed earnings and took a bath, no less than 7 of these firms came out and reiterated their “Strong Buy” rating on the company and reiterated their price targets ranging from $125 up to $165 a share.

These proclamations of Apple’s value came after Tim Cook, the CEO of Apple, said that the quarter sucked because of “macro headwinds.” These are the very macro headwinds that I’ve been discussing for over 6 months. Yet despite the CEO’s own words and the fact that these headwinds aren’t turning into tailwinds anytime soon, 7 of Wall Street’s biggest firms, think that it’s reasonable to expect Apple stock to appreciate by 30-80% in the next 12 months.

Rather than buying a stock just because it hits some firm’s version of a conviction buy list, let me offer you are more successful way to evaluate a company’s appreciation potential. 

The Critical 3

I always trade markets (stocks) based on my bias for 3 critical aspects: fundamental gravity, quantitative, and behavioral. Once I’ve evaluated those 3 aspects, I give the market or stock an overall bias and then I trade in the direction of that bias. 

When it comes to evaluating a market, I always start with the fundamental gravity, which I determine using a time-tested, proprietary process. By far the most important aspect of a market is whether or not the economic and policy environment for that market is bullish or bearish.

Since the end of Q1 2015, the fundamental gravity for technology companies has been decidedly bearish because of the economic and policy trajectory here in the US. This is why I have avoided all US technology stocks, including Apple, and continue to do so. 

Quantitatively, it’s not surprising to me that AAPL peaked just a month after the fundamental gravity turned bearish. Since peaking on April 28, 2015, AAPL has been in downtrend making a series of lower highs. I’ve had an ALPINE line of $112.00 since late December. Here again, it didn’t surprise me that on 4 attempts in 2016, AAPL touched but failed to close above this critical line. April 15 was the final failed attempt and AAPL declined for the final 7 trading days leading into last week’s earnings call. The call and subsequent post-call price action has left AAPL sitting just above its ABYSS line at $92.60. It’s possible that AAPL could find a floor here but be careful, if AAPL closes below this level, the next critical level is $70, a solid 25% lower.

Behaviorally, when I evaluate stocks, I use a combination of factors that my research has shown to be consistent predictors of future price movement. One of those factors is tracking the very analysts’ rating that I just got done undressing. You’re probably scratching your head and thinking, “wait, he just got done telling me not to listen to Wall Street analysts and now he’s telling me that its one of the information sources he uses to make decisions.”

When you are evaluating the behavioral aspects of a given market, or stock, its critical to understand the information that the majority use to make decisions. The truth is, a vast number of sheep make buy and sell decisions based on analysts’ ratings, as flawed as they may be. That’s good news for us lions.

Remember the lopsided 80% of firms carrying a “strong buy” or “buy” rating on AAPL? That is helpful information when evaluating the behavioral aspect of stock. That type of lopsided rating means that Apple is priced for perfection. Any misstep with earnings, sales or forward guidance and the stock is going to take a hit.

When it comes to analyst ratings take advice from Winston Churchill. When speaking to the British House of Commons on the rising threat of the Nazis, Churchill was met with a sea of laughter. His response, “Laugh but listen.” Laugh at analysts’ ratings but listen to the insight those ratings can give you about the sheep mentality regarding a company.

I say, Wall Street, stop destroying people’s portfolios with research that provides absolutely no value whatsoever. Investors would actually like to retire at some point and those that are retired would rather not go back to work as a greeter at Walmart. 

It is critical to curate your information very carefully. Just because the information comes from a brand name, global firm doesn’t mean the information is valuable. Using Wall Street information, without the proper filter or perspective, to make investment decisions, is a sure fire way to find yourself saying, “Welcome to Walmart.”