Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. George Kasario
One of the problems with Apple (AAPL) is that it’s too big of a company. In fact, despite its correction, it is still the largest company in the world by market cap. Many people might say that the bigger the market cap the better, but when your number one, there are certain issues to keep in mind that make being number one a negative.
See, when you are the biggest company in the world, then you have more analysts breathing down your balance sheet than anyone else. They will fine comb your stock on a daily basis and take issues with the slightest thing, even if it’s not a big deal.
When your number one, then everyone is jealous of you. I am not superstitious, but the evil eye is something that most cultures believe in. Is Apple’s correction a case of the evil trader eye? I don’t think so, but then again everyone is running out of explanations.
But the most important thing when you are the biggest market cap company in the world is that you are also – by default – a proxy for the world economy. So sometimes your stock might correct, but the correction might have nothing to do with you. I, for one, think this has a lot to do with Apple’s current correction.
But then there is another problem when you are number one. See, When you have one of the largest cash piles in world – even compared to most countries – then everyone wants to take it away from you. David Einhornseems to be getting closer to forcing Apple to issue preferred shares after a federal judge blocked Apple’s proxy vote proposal, whereby in order for the company to issue preferred shares it has to get shareholder approval.
But why is this so bad for Apple’s stock if, as David Einhorn says, it will add value to Apple?
In reality, David Einhorn might be correct. It might actually add value to Apple’s stock, although no one can be sure of how much. However, one thing I am sure of it this: 2+3 will not add up to five. Let me explain.
If Apple were to issue preferred stock to Apple’s current shareholders, and pay out $10 billion in dividends, then that preferred stock might actually be worth as much as $200 billion. But will the common stock also have the same value as today?
This is a tricky question, but my sense is no, it will not have.
What I think will happen is that the preferred might actually be fully valued, but the common stock might correct substantially from current levels.
So if the preferred will have a value of $200 billion, how much will the common be worth? No one really has an answer but my guess is around $300 billion or even less.
Like I said, no one can be sure how the market will end up pricing Apple’s dual class share structure, but if I am correct that the common stock will be worth much less than today, then the million dollar trade might be the following.
Sell Apple’s common stock today and buy it back right before the ex-issuance date of the preferred.
- You will buy back the same number of common shares at a much lower price
- You will also get the preferred shares as a bonus
David Einhorn’s plan is still far off from being a reality, but the more it becomes a possibility, the more this trade makes sense and the more Apple’s stock might correct until the preferred is issued.
Makes sense? Maybe or maybe not, but it’s as good as an explanation as any for Apple’s current correction, and it definitely beats the evil eye theory.