The Next Questions for Apple

 | Mar 19, 2012 | 7:25 AM EDT
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Editor's note: Welcome our new "Day Ahead" writer, Brian Sozzi! In addition to his daily market take, Brian will continue to offer insights on retail, the general market and whatever else strikes his fancy. A special thanks to outgoing "Day Ahead" writer Kate Stalter, who will still be contributing to Real Money.

I happened to receive a nice pre-birthday gift, being asked to author the "Day Ahead" column. Although I enjoy developing investment themes from thin air, the real deal is that I am a human Bloomberg terminal and never quite turned off from the market.

On to the fun stuff. The market was queued up to make Monday a day of positioning ahead of key housing data (especially key because expectations are elevated) and the never-ending fourth-quarter retail earnings season. That sense of calm has been thrown from the window on news that Apple (AAPL) will finally shed light on its plans for cash deployment (my ex-analyst desk gave me the business for stating on-air Apple would eventually do a special dividend, so my turn to rib them a bit with a replay).

In premarket trading futures were mixed, with the Dow and S&P indicating a slightly lower opening and the Nasdaq slightly in positive territory.

Apple climbed 3.75% to top $607 before hours.

I continue to think Apple will favor a special dividend, but remain uncertain regarding a host of other topics likely to arise from this circus event.

Questions to Now Ask on Apple

  • What would be the ongoing dividend payout ratio relative to peers? Anything short of absurdly robust risks hurting expectations on an outcome that only until recently has been hyped.
  • Anyone else think this is odd timing days after the newest iPad release and analysts saying crowds were less overwhelming than at previous iPad launches?
  • Everybody's attention will be on a dividend (if it's confirmed), but I would sure like to hear Apple's thoughts on acquisitions (I favor purchases in Apple's supply chain so that it could keep costs of new technology low and undercut competitors). Remember, the fact that other tablets exist in the market, and are decent options, are a reminder the company plays in a low barrier to entry world. It isn't any Buffett Burlington Northern.
  • Is Apple opening a floodgate where it has to continually raise its dividend or risk murmurs that growth is slowing?

In the end, Apple mailing checks to shareholders quarterly makes its stock like the 2000 New York Yankees, almost unstoppable. Theoretically, we have a company positioned to materially beat on earnings for the foreseeable future, a stock not sporting an excessive valuation and a long-sought-after dividend payout all prior to a possible Apple television and acquisitions that will only serve to widen the competitive gap. Tough to bet against that type of investment thesis long term and at this point, it's a matter of picking and choosing spots in the stock leading up to product release unveilings or earnings releases.

Beyond Apple mania, it's housing mania this week. Gene Balas does an awesome job getting to the bottom of the macro topics at large, so I will simply draw attention to this weekend post from yours truly.

I think one of the primary reasons that consumer spending has remained resilient in the last year or so is due to the structural changes households have made to their debt servicing requirements, for example continuing to pay down credit card balances as well as refinancing mortgages at very low rates, compliments of the Fed. There are other factors at play to explain the spending, but the knowing that two large bills each month are either lower or non-existent has helped reignite spending power.

With that said, if you are not watching 10-year note yields as closely as market masters now, make it a daily exercise. The Fed upgraded its assessment on the economy (no new unconventional easing was the takeaway, which removes a psychological prop) and we received a month-to-month acceleration in headline CPI (so why stick with the safe-haven status of Treasuries; if companies could pass on higher energy costs to consumers, which has been show in many instances, profits and stocks valuations benefit), and that has me wondering about the durability in homebuilder stocks (key companies at or near 52-week highs) and derivative names.

Inside Edge on Earnings and Events

Tiffany (TIF) Earnings

I had the entire weekend to rehash my bearish pre-earnings stance and continue to be perfectly content with sitting this dance out. The feeling I have is that the initial fiscal year guidance will be soft and the market unwilling to give the company the benefit of the doubt (rationalize the guidance as super conservative). Tiffany's management has a fairly lame conference call procedure (ditto Wal-Mart (WMT) while I am at it) so my focus points are as follows:

  1. Gross margin: Product mix has shifted negatively and costs are headed higher. Is Tiffany able to surprise the market after disappointing it on this line in the third quarter?  If it does surprise, it would signal a bit more pricing power than I thought pre-release.
  2. Europe: Same-store sales are on a clear downtrend. You want to see stabilization in the quarter to quarter tend. No stabilization, there is risk to whatever fiscal year guidance that is disseminated.

Starbucks (SBUX) Annual Meeting

Completely lost in the shuffle this week is the annual meeting at Starbucks. Don't expect any sexy numbers to be tossed about, but instead for the event to be used as a platform to sell the company's international growth initiatives alongside an exciting U.S. growth outbreak (same-store sales, K-cups, coffee machines, products on supermarket shelves). It's worth noting that the company's last two annual meetings have served as springboards for the stock. I am unsure if this event will inject even more caffeine into the stock given the year to date run, though find it's hard to fight the tape here.

Only six analysts out of 30 on the Street have raised their earnings estimates for the current fiscal year (ends September), and next, in March.  Moreover, a good portion of analysts have not budged on estimates since late January despite strong indication revisions are required (stock is moving in front of those revisions if you ask me). I would not be surprised to see analysts increase their estimates in the days following the annual meeting.

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