Apple Off the Cliff

On Friday, I made Apple my largest stock holding.  It passed up Cisco, which has been a very solid performer for me.

Stock	Shares	Avg Cost	Current Price	Dividends Received	Pct Change	R3K Change	Diff
AAPL	150	527.94	509.79	-	-3.4%	-0.2%	-3.3%
BHK	2,240	12.75	15.12	2,554.27	27.5%	5.1%	22.4%
CSCO	4,292	17.22	19.86	2,013.95	18.1%	6.4%	11.6%
CSQ	5,444	8.26	9.96	5,241.56	32.1%	21.4%	10.7%
FCX	1,100	32.17	33.78	-	5.0%	0.4%	4.6%
FSC	2,803	9.81	10.40	2,058.92	13.5%	4.3%	9.2%
HFC	1,117	34.16	46.60	2,586.20	43.2%	3.0%	40.2%
INTC	1,974	20.99	20.53	1,998.36	2.6%	15.1%	-12.5%
JPM	1,673	35.22	42.81	992.36	23.2%	6.4%	16.9%
JQC	4,192	9.11	9.73	4,663.74	19.0%	5.9%	13.1%
KMF	1,845	21.97	28.92	3,637.01	40.6%	17.9%	22.7%
MPC	582	43.98	62.83	546.09	45.0%	4.0%	41.0%
MSFT	979	26.83	26.81	1,534.52	5.8%	15.4%	-9.6%
O	556	19.33	40.36	7,377.95	177.4%	67.1%	110.3%
OIBAX	3,925	4.93	6.62	6,589.08	68.3%	67.1%	1.1%
PGR	2,092	20.54	20.99	2,000.00	6.9%	4.7%	2.2%
PRE	536	67.43	81.53	1,285.77	24.5%	4.9%	19.6%
PVD	427	65.11	103.95	3,787.87	73.3%	17.9%	55.4%
SAI	4,680	12.83	11.67	1,376.70	-6.8%	0.5%	-7.3%
SLCA	2,000	14.28	16.08	-	12.6%	-1.6%	14.3%
STO	1,040	23.82	24.58	1,121	7.7%	20.2%	-12.5%
VIVHY	2,296	16.70	22.20	3,749	42.7%	3.5%	39.3%
Total Open				55,115	22.6%	9.2%	13.4%
Closed					10.7%	8.6%	2.1%
Combined					14.0%	8.8%	5.2%
IRR Since 12/31/10					15.3%
2012 Gain					23.6%

Actually, a funny quick aside on CSCO. I was looking at dividends the other day and saw they had accelerated their most recent dividend.  It had gone x-dividend October 3rd, which meant I was expecting the next x date to be around January 3rd.  But I just saw it went x Nov 27th! Not sure if that means everything else will be moved up, or I have to wait until April 3rd for next one.

CSCO probably accelerated their dividend for tax purposes.  I also believe taxes are the largest driver of the AAPL sell-off of late.  Which makes it an extraordinary opportunity for us.  It is easy to point fingers and find something "wrong" with Apple every quarter.  But you can do that with any stock.  You need to step back from the noise and just look at what Apple has become.  Not only does it have a dominate market share in two of the fastest growing markets (smartphones and tablets); but with I Tunes, it has a way directly into the wallets of millions of people. Here are some stats from Wikipedia:

1.  As of October, Apple had a 64% share of online music.
2. Between Feb 2010 and June 2011, they went from 10 billion songs sold to 15 billion.  That is stunning.
3. From July 2011 to March 2012 they went from 15 billion apps downloaded to 25 billion.
4. According to IDC, smartphone growth was 45% in 2012. They expect over the next 4 years for the annual growth rate to be 18%.
5. IDC expects tablet growth to double over the next 4 years, which is also about a 18% CAGR.

Millions of kids will get I Tunes gift cards in their stockings.  I started using an I Pad regularly last Spring and I liked it so much, I bought my first IPhone last month.  While there are some strong competitors; Apple offers a very compelling product and still holds first mover advantage.

Why the sell-off?  Apple has exploded the past few years. Two years ago, a hedge fund could have bought the stock for $320.  If they invested $10m in AAPL, they are sitting on $6m of long term capital gains today. When the sell off started, they would have been sitting on over $10m of capital gains.  The LT capital gains tax rate is 15%.  It is forecast to move to 23.8% in 2013 unless Congress and the President act.  So if you are sitting on $10m of gains and sell today, you pay $1.5m to Uncle Sam.  If you wait until January 2nd, you pay $2.3m.  That is more than a 50% increase.  People are doing the math and selling, assuming they will be able to buy back their positions (in my opinion).

If the selling accelerates, I will likely buy one more tranche.  I do believe it is a gift from the tax gods and is panic selling.  It is remarkable that a company with the balance sheet, products and reach of Apple is selling at just over 9x next year's projected earnings and far less when you pull out cash and investments.

Ok, I will get off the soapbox and stop pounding the table.  I am actually rooting for another pullback to the $485 range, where I can buy another slug.