The Best of Kass

NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.

Among his posts this past week, Kass explained why he's buying shares of Apple and why some recent news from China is encouraging.

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The Apple of My Buy
Originally published on Friday, Nov. 9 at 8:44 a.m. EDT.
  • Hey, I never said that it was a forbidden fruit.
  • Similar to many, I historically (let's call it over the last five years) failed to recognize how successful a Steve Jobs-led Apple ( AAPL) would be as a disruptive innovator of product.

    In my " 15 Surprises for 2012" (written 11 months ago), however, I waxed enthusiastically about the prospects for the profit cycle and share price for Apple. (At that time Apple's shares stood at $403.)

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    Again, in July 2012, I wove a positive tale of Apple's long-term prospects.

    Nonetheless, when the shares hit $700 in late September, I turned cautious in " The Bear Case for Apple."

    My concerns were multiple, and the major risks (most of which I thought would play out over a few years, not a few quarters) were as follows:
    • Global economic weakness in 2013 would likely have an adverse impact on Apple's relatively high-priced stable of products.
    • Challenges of delivering a high-quality product in quantity.
    • The risks associated with the loss of Steve Jobs were being underestimated by the markets.
    • Investors may look beyond the recent new product offerings. The steady stream of "wow factor" products in the company's pipeline may be in jeopardy following the release of the iPhone 5 and of iPad mini.
    • A changing competitive landscape could be a challenge to the company's market share and profitability.
    • Apple's shares were overowned and were the beneficiary of fund flows. The almost religious belief in the company (on the part of individual and institutional investors) represented an extreme in investor sentiment.
    • Apple's valuation, though inexpensive relative to the market and its projected growth rate, was very expensive (on a price-to-sales basis) relative to other hardware companies and on an absolute sales basis.

    Ten days later, in " More Bruises on Apple," I raised additional concerns. I again asked whether there was anyone left that doesn't own Apple's shares at that point in time and how many money managers (in part because of the weighting in the indices) are now overweight the stock, particularly after the aforementioned period of outperformance.

    October, in " Will Apple Fall Far From the Tree," I underscored why the easy comparisons and salad days were likely behind this iconic company and that risk/reward seemed uninspiring with the shares being range-bound (and with a lower end of the range at about $550 a share). I concluded that there are now blemishes and bruises on the world's favorite fruit. Specifically, there were early signs of Apple losing its first-mover advantage (and the elevated gross margins previously achieved). I further suggested that investors now must closely watch whether the company's upgrade cycle is lengthening because of a less-differentiated product, they must monitor the ability to deliver a large amount quality product with limited flaws (e.g., apps such as Maps, scratching, Siri, weight/feel, etc.), and they must closely track cost and margin trends and, of course, the competition.

    Since I expressed my initial concerns in late September, Apple's shares have fallen by $165.

    The shares now stand at $536, and I am buying.

    Now let me explain why I have just purchased shares in Apple (my answers correspond to the list of concerns listed at the beginning of this column):
    • As expressed in today's opening missive and in my writings over the last few weeks, I am now less concerned about a global economic slowdown than most.
    • Investors are no longer smug and have grown increasingly (and arguably fully) aware of the challenges of the delivery of current and future new products.
    • Apple's shares are no longer the beneficiary of fund flows -- just the opposite has been occurring, which has materially pressured the shares down to attractive levels.
    • At $700, Mr. Apple Orchard -- er -- Mr. Market was likely imputing a 2013 new "wow" product (Apple TV?). At current prices, the next "wow" product has been discounted away, and the company's completely refreshed product line (no mean feat in such a short time frame, and if supply comes in line, CEO Tim Cook's main goal for 2013) should be plenty enough new stuff to once again propel earnings throughout 2013. Also, here is a link to AppleInsider, which hints about a possible new product associated with the automotive industry.
    • At $536 a share, a discounted dividend model implies that the future growth rate in profits at Apple will be only about 5%. This is too low -- Apple's share price decline has likely now overly discounted most (if not all) of my concerns.

    At the time of publication, Kass was long Apple.


    Global Warming
    Originally published on Friday, Nov. 9 at 7:14 a.m. EDT.
  • Prospects for China soft landing and global growth improve.
  • October Chinese consumer inflation rose by only 1.7% year over year compared to estimates of 1.9% and 1.9% in September.

    This was the slowest rise in almost three years, as food inflation slowed dramatically to only 1.8%. (September print was 2.5%.)

    A low inflation rate is important as it allows the central bank the ability to ease further. That said, retail sales (up 14.5%) and industrial production (up 9.6%) accelerated in October, so no near-term moves are likely.

    The low rate of consumer inflation gives the People's Bank of China the leeway to ease further, but recent data (industrial production/retail sales) accelerated last month, which allows the central bank to watch/wait and see.

    In summary, the risk of a global economic cliff has receded in the last two weeks as economic data from the U.S. and China have improved, and the EU data (despite the hyperbole) have stabilized (off of low levels).

    In other words, the world, it seems is not coming to an end, though it might feel like it is the case when looking at the U.S. stock market.

    Technically, the market has clearly entered brokedown palace, and my next column (an update of George Lindsay's "Three Peaks and a Domed House") is sure to scare the crap of you and raise questions as to where Mr. Market will bottom.

    However, if fear is the friend of the rational buyer, numerous opportunities for the long-term investor are likely developing.

    Finally, with regard to the fiscal cliff, I am working on my analysis over the weekend and will come up with my conclusions in Monday's opening missive.

    At the time of publication, Kass had no positions in stocks mentioned.

    Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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