I own three Macs. My uncle owns two. My cousin, at least one more. So steeped am I in the so-called Cult of Mac that I own a black turtleneck. But I can no longer allow my portfolio to have a position in Apple
My problem is best summed up by a blistering rebuke of Jobs delivered by my Foolish friend and colleague Seth Jayson three weeks ago. At the time, Seth wrote that Jobs and Apple's management offered a too-little, too-late apology for gruesome options backdating practices of which Jobs was aware, and which appear to have transferred wealth from shareholders to members of his executive team.
Many posters to our Apple board disagreed with Seth's account. I do not. Instead, I think he's laid out a perfectly clear case for why Jobs, for all his obvious talent, isn't a Foolish CEO of the caliber of General Electric's
Foolish CEOs seek to enhance shareholder returns because, as shareholders themselves, they're content to get rich right alongside the rest of us owners. That's obviously not Jobs; he owns slightly more than 1% of the company, according to the latest proxy statement. Contrast that with his widely reviled buddy in tech, Larry Ellison of Oracle
Taking emotion out of the equation
But there's more than moral outrage at work here. Indeed, the truth is I'm not really outraged at all. I sold my position in Apple because Jobs' flimsy apology and the lack of real consequences that came with it suggests that he and other Apple executives are content to hold shareholders at arms' length. It's as if he's pleading for us to simply trust him, and all will be well. Someday.
Maybe he's right. Jobs has certainly earned the benefit of the doubt when it comes to product design. But I'm not nearly as sure of him when it comes to acting as the steward of billions in shareholder capital. The stark, unemotional truth is that, right now, we investors don't know everything there is to know when evaluating the Mac maker. And that, in turn, increases the risk of loss.
When risk becomes a threat
Risk alone isn't bad, of course. It's when the potential for risk to be realized outweighs the potential rewards that investors lose. I fear that the equation has finally gone negative.
Consider the valuation of the shares. Apple is priced as though it will grow earnings at roughly 28% annually for the next five years. That's possible, of course; Jobs and his team managed 174% compound annual growth on the bottom line over the past three years.
But current projections assume that Apple's recent earnings reports are accurate. We already know that they aren't. Management says so at the very outset of the latest financial release: "These preliminary results may be subject to significant adjustment as a result of a likely restatement of historical results."
Isn't it impossible to produce a fair value for Apple under such conditions? It would seem so to me.
I purchased January 2008 call options in June, at around the time Apple's underlying shares were trading for $56 a stub. My thinking was that concerns over competition were overblown by a brutal summer downturn. The LEAPs allowed me to mitigate the valuation risk that comes with a very high P/E. Plus, I believed that if any of the catalysts I outlined here came to pass, I'd be sitting on a multibagger.
My plan worked out even better than I had imagined. After just three months, my position was up 120%, a gain for which I must thank Jobs and his team. So, Steve, thanks.
But, of course, it was also your failure of oversight that suddenly and egregiously increased my risk, forcing me to sell and give up the potential for still-greater gains. Sour grapes, you say? Maybe it is. But I've been in the market long enough to know that investing on the blind, as I would now be with you, is as reckless as it is stupid. I won't do it again.
So, yeah, thanks, Steve. Thanks a lot.
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Fool contributor Tim Beyers, ranked 1,330 out of 11,654 in Motley Fool CAPS, is much more pleased with his MacBook Pro than he is with Jobs' management. C'mon, Steve. You can do better. Tim owns shares of Oracle. Get the skinny on all of the stocks in Tim's portfolio by checking his Fool profile. The Motley Fool's disclosure policy is always on the up-and-up.