Why Doug Kass is Wrong About Apple

Doug Kass recently came on Fast Money touting his successful Apple short, ($546 to $528) and explaining the logic behind it. Although Kass is a famous short-seller, he also called the market lows back in 2009 and went long, so he understands value, he's someone I respect, and in investing I do my best to see the world through a broader lens, and evaluate the the validity of others' opinions, and, if they have merit, I can alter my plan of attack.
Mr. Dougy Kass. Sharp as a tack, but wrong this time
Kass made the following points:

1) Quoting: “I would say this preoccupation with Apple is becoming a borderline mania. if you just consider the time every evening that Fast Money devotes to Apple, the shoe shine boy owns Apple. I go to cocktail parties and every noninvestment professional owns only one stock. and that's Apple.”

2) The recent huge upside surprise in earnings will likely never be repeated again

3) The company must overcome the following obstacles:
-  potential for supply chain disruptions
-  worsening macro-economic conditions
- increased platform competition.

4) He also is bearish on the market in general, citing unspecified geo-political concerns. (likely European debt and Iran)

Okay, let's evaluate his points and see if they make sense. Let's go in reverse order, since I'll spend the longest time discussing #1.

Kass point #4) A rising tide (market) lifts all ships, and conversely, as money ebbs out, stocks fall with the tides. If Kass is predicting a fall in the broader market, then okay, he should short the market, get short the companies most likely to be hurt by the reasons he believes the market will fall. I'm going to say this is neither here nor there when evaluating Apple on an individual basis.

Kass point 3) a) Potential for supply chain disruption ... this is the onus of the company's managers, unless he has specific credible information that we don't, you could say this about any company. 
    b) macro-economic conditions? Okay, same as point 4, then just short the market.
    c) The only point here which makes me stop and think is increased platform competition. My response to this is, that's the nature of capitalism. Success breeds imitation.
That said, Apple continues to win die-hard converts, that refuse to go anywhere else. You couldn't pry their IPhone out of their lifeless hands if you tried. As long as Apple continues to innovate at speeds approaching light, which remains to be seen now that Jobs is gone, I, even as a HUGE Google/Android fan, don't necessarily believe this as great a threat as Kass makes it out to be. Windows phone, might be getting rave reviews, but apple is more likely to take over the desktop with  their Mac Air, then Microsoft is to take any substantial market-share from the IPhone.

Kass point 2) With as many analysts as the highest valued company in the world has, how did they beat profit expectations by so much? Apple, like Google, is a notoriously secret company. Google also soundly beat estimates for a couple quarters in row, then under-performed. Maybe they didn't tip their hand to the analysts as do others. Yes, Apple blowing away expectations gave the stock a jolt, and Kass believes to have as many analysts guess wrong is an unlikely future event, but as long as Apple remains tight lipped, a similar event is no more or less likely than today. I mean, how many more analysts are there in the world that could conceivably cover the stock?

Kass point  1) That the attention Apple gets is borderline mania: totally true. Apple this, Apple that, it's the hottest company in the world. The investment proletariat owns Apple stock, it's spoken about parties, all true. Warren Buffet has a quote that Kass referred to, "What a wise man does at the beginning, the fool does in the end." Essentially, the impressionable and dumb are taken in by the bubbles, finally put their money in at the top, as the sharks pull their money out. Real estate, internet stocks, tulips, whatever it may be, this is true. 
And I look at his point, and I say simply, yes, absolutely, let me look into this, but then you analyze the stock. It's no tulip, it's not a McMansion, or a web company with no earnings. It trades at a P/E ratio of 15, it has one hundred billion in cash, and the hottest brand in the world. 
My simple answer to Kass is that fundamentally, this company is not overvalued. When I look for a short, I look for a stock that has gotten far ahead of its intrinsic value. In this specific case, there is still a lot of room for hot air before Apple balloon is primed for a popping. 
How to evaluate not only Kass's short, but sticking to your guns
The lesson here is, fundamentals and value trump psychology in the long run. Whether that be a bubble inflating the price of useless assets, or even analysts I truly respect like Kass calling a bubble prematurely. I always try to apply this as much as possible when evaluating potential investments, rather than getting caught up in the stampede of the bulls, or running prematurely from the bite of the bears.
In the case of apple Mr. Kass, it might seem like a duck, quack like a duck, but when you look at it through binoculars, this stock is still an eagle, with room to soar. 


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