Doug Kass's Trading Sardine: Apple

Continuing the trend of highlighting some of Doug Kass's trades ahead of his showdown with famed investor Warren Buffett in Omaha on Saturday, I am following up with one of his favorite stocks to trade. The one, the only, Apple ( AAPL).

This week, the company made headlines by issuing a record $17 billion of bonds, with much fanfare. The debt issuance was in response to the company's commitment to returning $100 billion in capital to shareholders.

Last week, Apple reported second-quarter earnings that beat analysts' expectations. At the same time, the company announced plans to buy back an additional $50 billion in stock while raising its dividend by 15% for an annual yield of about 3%.

Doug has traded the stock extensively over the past year, starting around the time when many began to question its sustainability as a growth stock. The capital deployment plans mentioned above certainly help to move the stock further into the value category.

We'll go in chronological order, but it's important to note that Doug has traded Apple both long and short and the trades mentioned below only highlight some of the trades he made. The first trades we'll cover were on Nov. 27 (daytrade) and Nov. 29 (covered on Nov. 30), 2012. Both were short trades, with the stock trading around $591 on the initiation dates. By this time, the stock had already come well off its September 2012 high of $705, but had rebounded from a low of $525 in mid-November and Doug wasn't convinced that the downside was complete. He covered both these shorts after they had declined around $7.

Switching gears, Doug suggested taking the long side of Apple in late-February 2013. This was just ahead of the company's shareholder meeting (set for Feb. 26) but after hedge fund manager and Apple investor David Einhorn had sent a letter to shareholders asking that they vote against Apple's proposal to do away with preferred stock so that the Board can unlock the cash position. By the end of the month a handful of analysts started talking about the potential for a cash distribution to be announced at the shareholder meeting.

Doug went long on Feb. 22, and traded it through Feb. 27, buying dips and selling rips, before closing out the position profitably. Between those dates the stock traded between $450 and $444. At the shareholder meeting on the Feb. 26, management only said that it was "seriously considering" returning cash to shareholders. Doug has stated many times that he viewed Apple as a trading sardine, not an eating (or investing) sardine, and that is the philosophy he maintains through the current period. Competitive pressures, the mix shift toward lower-margin products and the capital deployment uncertainty (until recently) supported this philosophy.

Dates of additional trades are below:

  • Once again, Doug went long Apple shares March 1 through March 5 but didn't do as well. At this point, Doug had thought the stock was too cheap to pass up.
  • Again based on valuation, he started building another long rental on March 11 at $425.50 and was able to successfully sell out for a 6% gain on March 18 at $451.
  • On April 3 a new trade was initiated - Doug picked up some shares at $432.30 and took a small loss on the overall trade on April 9th.
  • He reentered Apple on April 18 at $390.50, and added more at $387 on April 19. He then sold a tranche on April 19th at $397 and another tranche at $397.50. Doug exited this name before earnings and does not currently hold a position.
At the time of publication, Lindsey Bell had no positions in the stocks mentioned.

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