Friday, 27 May 2011 06:48

Goldman Sells Nearly Half $Billion Of Apple Stock Directly Into Their Client's Conviction Buy Recommendation: Guess Who Really Agrees With Reggie Now!

Oh, this is getting good. For those investors and technology consumers who feel emotional attachment to publicly traded C corporations, brace your ass hairs, 'cause the truth is about to come barging out of your screen. Yesterday I posted the most recent of a long string of articles detailing the impending and inevitable margin compression coming to Apple. It is my opinion that the analysis and the logic behind the analysis is unassailable. Granted, most of the analysis is behind a paywall, but the logic is laid bare for all to see,  as excerpted:

Last week I posed the question, “Is The Evidence For An Apple Margin Collapse Now Incontrovertible?“. I received some interesting, albeit, rather passionate answers - many of which failed to address the core core issue, which is can "Apple compete with the rapidly rising technological bar that is simultaneously facing rapidly dropping prices without suffering a hit to margins?".  Phrased differently, "Can Apple’s brand allow it to charge materially more for less product in the face of over 400 competing devices connected by the fastest growing and most diverse ecosystem in the business?" Sounds like a tough sell, doesn’t it? This is not about who is better, who is worse, who will win, and who will lose. It is about margins. Apple may not even be in the race if it doesn’t run, and to run may very well mean margin compression.

 

Well, if margin compression wasn’t “Incontrovertible” last week, it certainly should be this week. Let’s walk through margin compression as a result of excessive competition step-by-step, starting by solidifying the thesis behind the recommended updates to the Apple Margin Compression Thesis & Google’s valuation model. Subscribers, adjust your BoomBustBlog Valuation Models Accordingly:

 

Okay, Reggie says "Margin Compression"., What does the most esteemed of the esteemed of Sell Side Wall Street say? Let's reference that Bastion of UnProfitable Advice, Goldman Sachs!

Be aware that I have spent considerable effort warning subscribers and free content readers of the games being played over at Apple. Apparently I am one of the very few, if not sole sources for said analytical content. In the , meantime, the esteemed broking houses of sell side Wall Street have been busy passing out big buy recommendations at unrealistic prices all day long. Reference "Goldman’s $430 Target, Screaming Buy On Apple At Its All Time High Is In Direct Contravention To Reggie Middleton’s Logic – Who’s Right? Well, Who Has Been More Right In The Past?" Tuesday, December 14th, 2010 and "Reggie Middleton Takes The Challenge To Goldman Sach’s Apple Proclamation One Step Farther, Apple’s Closed System Risks Failure!" Wednesday, December 15th, 2010

Soooo, what do you think Goldman Sachs does as it fleeces recommends its clients attempt to ride Apple, the company with probably the most competition in the world in front of what is likely to be a global economic slowdown (at best) up to unheard of all time highs (off of its current all time high) in the face of impending margin compression?

The quick answer is they take full advantage of the illogical love-fest that was formerly know as Apple and front run the recommendation. After all, how many clients actually pay for that pesky BoomBustBlog analysis anyway. Most of them will never have a clue and we need to juice that bonus pool. It's finally getting warm and the new Azimut models are out with those funky IPS drives (you know how the baddest chicks dig yachts!)...

From the Street.com: Goldman Sachs Sells Its 'Conviction Buys'

A so-called Chinese Wall is supposed to exist between investment banks' research and asset-management divisions, but recent calls, especially coming from subprime-securites proponent Goldman Sachs, warrant further scrutiny. Goldman helped to catalyze the recent commodity sell-off as its researchers expected little upside when the economy hit a soft patch. Crude oil tumbled beneath $100 on that report. Then, two days ago, with few fundamental changes in the demand outlook, Goldman reversed its stance, advising clients to buy.

 

This flip-flopping from Wall Street's most closely followed researcher is being perceived by some as client-fleecing since the bank is able to trade in proprietary accounts before it releases research and the markets react, as they often do to Goldman's calls.

 

Similarly, many sell-side researchers award stocks "buy" or "overweight" ratings even as their internal asset-management units unload shares, presenting a conflict of interest and ethical dilemma. Goldman's most famous front-runs to date were the Abacus transactions, through which the bank allegedly postured for high ratings for its mortgage-backed CDOs, sold them to clients and then shorted them.

 

News broke yesterday, or rather, a blogger pulled data yesterday to show that Goldman dumped 1,260,802 shares of Apple(AAPL)during the first quarter, even as its research division rated the stock "buy" and maintained its lofty $470 target. Little due diligence is done in the journalism community on the interplay between asset-management and research units.

Hmmm!!! Averaging about $340 per Apple share, Goldman sold about $428,672,680 worth of Apple stock into Apple loving, Apple can do no wrong, Apple has superior user experience, Apple will never face margin compression, Apple has shiny new products on tap, Google Android phones are cheap, I don't care if the competition is taking over the world, Apple juice sucking client purchases. It also appears as if the street.com reference predates the NASDAQ rebalancing away from Apple, so that is not an excuse for the Goldman sale.

 

... Of the 58 so-called Conviction Buy stocks that Goldman recommended to clients during the first quarter, it sold 31, or more than half, according to its 13-F filing. [We did not include Goldman mutual funds in these calculations]. Of the 31 Conviction Buys that Goldman sold, it sold more than 1 million shares of 12 of those stocks, begging the question: How does Goldman define "conviction"? To most investors, it means putting your money where your mouth is.

 

Reggie vs Goldman Sachs

Why didn’t Wall Street read my post on Lehman being a yellow lying lemon? See “Is Lehman really a lemming in disguise?” and realize that this post was made on February 20th, when Goldman Sachs had a recommended price of about $55 while this blog warned that Lehman may be done for. This very similar to when I warned about the potential demise of Bear Stearns in January, when the rest of the Street had a “buy” at about $130 per share. See Is this the Breaking of the Bear?. 7 We all know how both of these stories ended. Please click the graph to enlarge to print quality size.

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If you look into my original post on performance (see “Performance!“), you can see when I recommended strong shorts on Morgan Stanley and Goldman Sachs, both highly contrarian views at the beginning of the year, and both returned way over 100% and in the case of Goldman, is still pushing profits.

Reggie's Analysis Trounces Goldman's Nearly Every Time, But It Has Nothing To Do With His Being Smarter Or Better. Reggie Doesn't Have Clients To Front Run!

Before anybody decides to jump on the Goldman bandwagon, it may be worthwhile to ascertain who was has been the most accurate over time. After all, we often query "Is It Now Common Knowledge That Goldman’s Investment Advice Sucks???" It has been asked in the past...Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

The impetus of this performance discrepancy is too much to go into here. The Street.com article scratches the surface, and Matt Taibbi's Rolling Stone article does a deep dive, reference The People vs. Goldman Sachs:

They weren't murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it.

Apple valuation

Yes, we are more optimistic on Apples' earnings than the sell side (reference page 16 in subscription document File Icon Apple - Competition and Cost Structure). "Why is that, considering all that you have written above?", you ask. Well, let's delve in farther from a logical, purely analytical perspective...

Hey, but didn't Reggie warn about this blatant manipulation many months ago?

Yer, damn skippy I did! Reference "" (yeah, that's right! The title says it all):

No, Google is not in the mobile space for search ads, it's looking to become the next Microsoft with Android as the next Windows. It is thinking big, simultaneously going after both the consumer and the enterprise space with cloud-based software and services - and advertising!

In the meantime, sheeple-like investors are being hoodwinked by quarter after quarter of Apple blow out earnings. Don't get me wrong. I feel and fully acknowledge that Apple is executing on all 8 cylinders of a 6 cylinder engine, but it still has its real world limitations. Apple will start to bump up against these limitation over the next 4 quarters, and the signs of this bump are already apparent. Of course, the signs are being handily masked by the games that Apple management and the sell side analysts of Wall Street play, with the "Sheeple" retail and the lazier component of the institutional investors being put out to take the eventual bullet.

Riddle me this - If Apple can consistently beat the estimates of your favorite analysts quarter after quarter, after quarter - for 11 quarters straight, shouldn't you fire said analysts for incompetency in lieu of celebrating Apple's ability to surprise? After all, it is no longer a surprise after the 11th consecutive occurrence, is it? I would be surprised if my readers were surprised by an Apple surprise. Seriously! Apple management consistently lowballs guidance to such an extent that it can easily manage, no - actually create outperformance. This has has a very positive effect on their valuation. Of course, I do not blame Apple management for this, of they are charged with maximizing shareholder return. The analytical community and the (sheeple) investors which they (allegedly) serve is another matter though. Subscribers can download the data that shows the blatant game being played between Apple and the Sell Side here: File Icon Apple Earnings Guidance Analysis. Those who need to subscribe can do so here.

Below, I drilled down on the date and used a percentage difference view to illustrate the improvement in P/E stemming from the earnings beats.

In our analysis of Apple, we are using real world assumptions of future performance derived from backing in to the low balling this company is prone to. If you look at its history carefully you can gauge what management is comfortable with, hence what they may be capable of on the margin. Using these more realistic numbers, it is much more likely Apple will deliver a miss in the upcoming quarters in its battle with the Android! The following is the reason why...

So there you have it. We have a stronger earnings component, but that earnings component is much less likely to be taken out by multiple, consecutive and repetitive upside "surprises". In addition, we see margin compression in the near to medium term as competition ramps up. Of course, our valuation flies in the face of that of Goldman's: Goldman’s $430 Target, Screaming Buy On Apple At Its All Time High Is In Direct Contravention To Reggie Middleton’s Logic – Who’s Right? Well, Who Has Been More Right In The Past? Tuesday, December 14th, 2010a and Reggie Middleton Takes The Challenge To Goldman Sach’s Apple Proclamation One Step Farther, Apple’s Closed System Risks Failure! Wednesday, December 15th, 2010

Last modified on Monday, 11 July 2011 09:50

10 comments

  • Comment Link H.Kwint Monday, 06 June 2011 04:30 posted by H.Kwint

    Navid:

    You repeated exactly my point: Patents are by no means a measurement of innovation. It wasn't me who confused the two; I was merely answering to the clueless post above me.

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  • Comment Link Reggie Middleton Thursday, 02 June 2011 10:37 posted by Reggie Middleton

    Apple definitely does a bang up job with design, but the mistake that just about everybody is making is assuming that only Apple can do this. Many companies have developed the technique: Bang & Olufsen, Bowers & Wilken, and now direct competitors such as Sony and Asus.

    As a matter of fact, Asus has one upped Apple by not only making aestetically attractive devices, but hyper functional ones as well. Much of Apple's panache and patina stemming from design definitely limits functionality. The transformer runs circles around my iPad in almost every single way - and for less money. The Padfone is a very practical idea (of course, they could have done much better naming it but they are on a learning curve :-)

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  • Comment Link Navid Thursday, 02 June 2011 10:29 posted by Navid

    you are missing the forest from the trees, sure Samsung may have more patents than anyone else. Having worked in technology for years, I can tell you that most companies are out of touch with design at the top levels, and when they sense innovation lacking they create "patent reward" programs - jackets, cash, as a substitute for innovation. So yes, they get patents, but of little worth. On the other hand, FEW or NONE of the companies orient themselves around design driven product creation, and are technology driven.

    If you don't know what i'm talking about, it is the difference between having architects designing buildings, or just having the civil engineer do the design. Only Apple truly has designers who work at the system level (versus visual designers who are "paint"). This is a subtle and deep point, you can go to many MBA programs and not get this is the "secret sauce" of Apple.

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  • Comment Link H.Kwint Tuesday, 31 May 2011 09:43 posted by H.Kwint

    JT: You have to be kidding me; Samsung owns 10 times as much US patents as Apple. So who do you think the innovator is, even if measured by the stupid unit of "no. of patents"? Moreover, what do no. of patents have to do with innovation? Microsoft has the same number of US patents then the top 10 of big pharma combined. Does that mean Microsoft is just as innovative as the top 10 of pharma companies combined?

    Please read one of the Apple patents, they're absolutely not innovative at all, as nothing is disclosed. They usually claim "a method of doing A", without telling how they actually do A. I can claim "A method how to drive a car" without explaining how to do it, but does that make me innovative? That's absolute utter nonsense. One of their patents read "If the user sweeps almost vertically, we assume they meant vertical". Without describing _ how_ they do that. There's no invention in such a nonsense patent at all.

    So, I don't hate Apple, just their ways of doing business by issuing this nonsense patents and then by way of propaganda making people think they invented something.

    Moreover, wasn't Apple sued because the iPhone's design was somewhat copied from the LG KG800?

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  • Comment Link JT Tuesday, 31 May 2011 02:31 posted by JT

    To: H.Kwint...
    By all means let companies steal the patented ideas of others. STUPID THOUGHT DUDE ! You are obviously an Apple basher or small thinker.
    Apple is the innovator whereas Samsung is the copier. If Samsung is copying Apple's iPhone and iPad then they should either stop producing their products or pay a licensing fee to Apple. This is standard practice to give recognition and monetary gain to the innovator.

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  • Comment Link H.Kwint Monday, 30 May 2011 17:18 posted by H.Kwint

    GS isn't stupid; they sold their AAPL stock right before Computex. The exhibition where Apple's competiton shows cool new products!

    Speaking for myself here, but I'm pretty impressed by what Asus comes up with:

    http://www.asus.com/News/UkFqFJ7zc3RfVTiF/

    Amongst others a MeeGo netbook for $199. And finally some 'stylish' designs where people probably won't blame it for copying Apple.
    But that's only Asus, there's tons more of new gadgets to be shown.

    In other news: The Samsung Galaxy S II sold more than one million times. And it's pretty much out of stock it seems. Last week I went to a Vodafone shop to get one, but they were sold out; and I couldn't 'pre-order' one from the next delivery! And Samsung already announced the S3 for Q1 2012.

    No wonder Apple has to resort to patent-troll tactics; it's the only way they can try to keep their margins. Much in the same way Microsoft earns $5 for every Android phone HTC sells:

    http://www.businessinsider.com/htc-pays-microsoft-5-per-android-phone-2011-5

    Of course, Apple wants some income for every sold Android phone too. In my opinion, when companies start to earn from licensing their 'past' innovations instead of selling products, it's the begin of the end. Hmm, well, at least the end of fat margins - like Reggie warned 'ya for months ago!

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  • Comment Link Bankers are our Enemy Monday, 30 May 2011 15:25 posted by Bankers are our Enemy

    Goldman Sachs is the devil. The thieves who orchestrated the biggest heist of all times, the theft of hundreds of billions of taxpayers money to themselves and their corpo-RAT friends.

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  • Comment Link anon989 Friday, 27 May 2011 19:13 posted by anon989

    A relative has a substantial position in Apple stock with a very low basis (ie <$10 per share). Given your view of Apple, what's the best way to deal with the position? Outright sale? Collar? Not sure whether stock was acquired before 1984, which is a relevant question for some strategies.

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  • Comment Link Reggie Middleton Friday, 27 May 2011 08:26 posted by Reggie Middleton

    The marketing potential manifested through digital coupons and promotions is simply outstanding. For all of those who wondered how Google will monetize Android...

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  • Comment Link jab Friday, 27 May 2011 08:22 posted by jab

    The announcement of Google Wallet is yet another card in Google's game to create stronger network externalities for Android handsets. To boon it is a perfect complement to their targeted advertising cash cow with Google Offers.
    As for Sell Side analysts, I have stopped reading anything they write for long.

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