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September 06, 2005

Taking Partial Profits in Apple Computer

There is a lot of anticipation and excitement surrounding this week's official announcement of the iTunes phone combining the efforts of two companies owned by Northlake clients, Apple Computer (AAPL) and Motorola (MOT). I think the iTunes phone launch is a positive for both companies and might be significant for the mobile phone industry as well. It appears the phone will launch at Cingular in the United States and at T-Mobile and O2 in Europe. Each of these operators is moving outside the walled garden approach which I think makes it more likely that cell phones move to the next level and become the dominant all-in-one device carried by individuals....

....As far as the stocks go, part of client positions in MOT were sold in late July when the shares first broke into the $20s, which was the initial target for the shares. Today, a similar trade was made in AAPL as the stock reached my near-term target in the upper $40s. The 52 week high of $48.33 was my target for reducing the position and shares were sold today at $48.31. AAPL's stock chart will look real good if it makes a new high but it is important to maintain discipline and take some money off the table as a stock hits your target price. This was the same rationale for the sales of MOT and Sears Holding (SHLD) earlier this year.

Consensus estimates for AAPL are $1.45 and $1.62 respectively, for the fiscal years ending September 2005 and 2006. I think 2006 estimates are low because I am a big believer in the halo effect and the coming boost in market share for the Mac platform. AAPL has about $8.75 per share in cash which produces around 15 cents per share in EPS. At $48, AAPL shares are trading at about 25 times earnings after adjusting for the cash balance. This strikes me as a fair price and thus was how I calculated a target price for today's sale.

For some clients this marks the second sale of AAPL shares. Initial purchases were made in January 2005 at about $35.25. The initial position size was moderate and a small amount was sold just over a month later at $45.07 for most clients. After the shares pulled back due to fears of slowing growth for the iPod, additional shares were purchased in mid-April at about $38.25. This second purchase made AAPL one of the larger individual stock holdings in client portfolios. Today's sale represented approximately half of client holdings bringing AAPL back down to a normal size position representing a little over 2% of most client portfolios.

Please note that due to the timing of account openings and other unique client circumstances, not all client portfolios hold the exact same securities. Therefore, any individual account may not have completed the transactions outlined in the previous paragraph. The purchase of this note, and other posts about trades, is to inform clients of the rationale supporting a particular trade and to give clients a better understanding of the investment process used in management of their accounts.

Posted by Steve Birenberg at September 6, 2005 11:26 AM