Shaking Apple's Money Tree

 | Jan 26, 2012 | 10:00 AM EST  | Comments
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This commentary originally appeared Jan. 25 on Real Money Pro -- Click here to learn about this dynamic market information service for active traders.

How is it that the greatest company in the world right now isn't the greatest stock in the world?

It's true that Apple (AAPL) is trading sharply higher this morning, but with absolutely blowout numbers and solid guidance, you'd think it would be even stronger.

There are three issues I see AAPL dealing with repeatedly. First, the company is a behemoth. The market cap moved back up to being the world's most valuable company today. Traders and investors carrying this stock higher are like the ants picking up a watermelon to carry it back to the anthill. Just as it takes an army of ants to carry that watermelon, it takes many, many buyers and a lot of money to move AAPL at this point.

Second, AAPL has become a proxy for traders. It has become the yin to the market's yang. You want to go long AAPL, but many are shorting the market (which it is a big part of) against it. You want to trade the Nasdaq, but maybe you just use AAPL or use it as a part of a basket. In and out. Out, and then back in. AAPL stops being a company and simply becomes a vessel to trade the emotions and predictions of the overall market. It can't even find a home with value or growth investors. Is it value or is it growth? The stock trades at a cheap valuation from a price to earnings to growth (PEG) standpoint with an incredibly attractive PE level, yet it is still growing at an incredible rate. So do you call it a growth or value name? And once you factor in the nearly $100 billion in cash and marketable securities, all those metrics look even better.

That leads to the third issue: cash. AAPL simply has too much cash and marketable securities on the books. It's like the Jimmy Fallon commercial where he asks who doesn't want more money. The answer is AAPL bulls. If AAPL would merely put some of that cash to work for investors in the form of a buyback or a dividend and pair that with a stock split, we'd see the stock run significantly higher.

A stock split is just psychological, but so is trading. Traders want to buy round numbers, and it makes sense since odd lots can be difficult. It is much easier (obviously) for a trader to get 100 shares at $150 rather than buying 33 shares at $450. A stock split might let more of the retail crowd back into AAPL and some of those would be buy-and-hold folks. A buyback would boost earnings-per-share numbers, allowing growth players more reason to buy, and a dividend brings in income and value investors who want upside to their portfolio.

Of course, there are other things AAPL could do with its cash that might not be as practical but could be a lot of fun. So here are my top 10 things AAPL should do with its cash hoard.

  1. Buy Research In Motion (RIMM) for $6 billion or $8 billion, even $10 billion, then take it out back and put it down. AAPL is Travis to RIMM's Old Yeller. It's a mercy killing that has to be done.
  2. Create its own self-funded lottery -- iLottery, or maybe iCanWin. Make it available only to iPad, iPhone, and iPod owners.
  3. Fund private schools and call them iCanLearn Centers. Students use only iPads, iMacs, iPhones and iPods. Then again, that may not be any different than public schools today.
  4. A joint Venture with Nike (NKE) to make an iCanJustDoIt sneaker. Rob Schneider (think Waterboy) can be the spokesperson.
  5. Buy a bank or broker. Gobble up Goldman Sachs (GS) at $55 billion, Bank of America (GS) for $75 billion or even Citigroup (C) at $88 billion. Then brand them as iCanLend, iCanBorrow or iCanSave. AAPL can have its very own iCan franchise.
  6. Expand the iCan franchise to iCandy and iCandy apples. There are plenty of candy makers out there, but how about Hershey (HSY) for $14 billion. There's even a theme park where your imagination could run wild.
  7. And if AAPL is going to have an East Coast theme park, it could also buy Michael Jackson's Neverland ranch. This one is cheap by AAPL's standard since it could be had for less than $50 million, I'm sure. I recommend recreating Katy Perry's California Gurls music video with Snoop Dog and everything. It works with the East Coast iCandy theme.
  8. Bring back Baywatch. Really, does this need any explanation?
  9. Get the New York Jets a franchise quarterback.
  10. And just as a personal favor, fund the sequel to Serenity. If you haven't seen this movie and you are a sci-fi/action movie fan, you are missing out.

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