Time to sell Apple? Watch these hedge fund managers

2015-02-08

By

MeenaKrishnamsetty

IanDogan

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Carl Icahn is very pleased with Apple’s AAPL, -0.84% performance since he disclosed his $1+ billion position in August 2013 when the stock was trading at a dividend and split-adjusted price of $65 per share. Apple shares jumped nearly 5% following a tweet he posted announcing his position.

Eight months earlier, Jim Roumell thought Apple was cheap and he bought some shares at $525 (or dividend and split-adjusted $72 per share). He increased Apple's weight in his 13F portfolio to 6% (making it the fifth largest position) by the end of March as Apple shares dipped below $450. He boosted his stake by another 40% during the second quarter of 2013 as Apple shares plunged to $390 per share. Apple's weight in his 13F portfolio approached 10% at that time.

You probably haven't heard of Jim Roumell. Insider Monkey follows mostly hedge fund managers, billionaire investors, and a few value investors. Our research has shown that the top small-cap stock picks of hedge funds historically outperformed the market by an average of 18 percentage points a year. We have also been sharing these stock picks in our newsletter in real-time for the past 2.5 years and managed to deliver an annualized return of 36% vs. 17% annual gain for the S&P 500 index during the same period (see the details here). Roumell is a deep value investor with a strong backbone. He doesn't invest in a stock unless he also feels comfortable with owning the entire company. He is contrarian. So, he is probably buying a stock when everybody else is selling and he is probably selling when everybody else is "very pleased". He isn't the kind of investor who regularly gambles with large-cap stocks. Most of his investments are in small and microcap stocks where he believes he can get an edge over other investors by doing scuttlebutt research.

We recently talked to Jim Roumell and asked him about his investment approach. His answer explained why he kept betting on a declining stock nearly 2 years ago:

"We ask ourselves always what our investment edge is. And edge is either information edge, where we have better information and this again, is why we really rely on industry contacts that really help us understand what's going on behind the curtain. We have analytic edge which is difficult to get but you can get it when you have superior information where everyone knows the same information but you're analyzing it in a superior way. The third is a behavioral edge, which was in Apple where we have no information that anyone else doesn't have, we have no analytic edge, we just have a behavioral edge and a willingness to be contrarian where others are kind of losing their mind a little bit."

Jim Roumell currently manages around $200 million and managed to deliver an annualized return of 8.8% vs. S&P 500's 5.2% since the inception of his company. He likes to invest in companies with strong balance sheets that have multiple shots on goal. He got involved in Apple after he noticed a big sentiment change among investors. "Everybody hated it at the same time. Profit margins were going to fall from 38% to 30%, no product innovation" were the words Roumell used to describe the sentiment shift toward Apple nearly two years ago.

Icahn's tweet changed the sentiment almost overnight. That lasted less than a month.

In mid-September Apple shares dipped below its August 13th, 2013 level. Icahn took the opportunity and bought more shares. Sentiment improved again following Icahn's "no-brainer" remarks regarding Apple after September purchases but markets ignored Icahn's strong bullish remarks last January after somewhat disappointing earnings call and dipped again below the $500 level. Carl Icahn took advantage of the opportunity one more time and bet another $500 million on Apple. He hasn't made any significant changes to his holdings since the end of the first quarter of 2014.

Now, with the benefit of hindsight, we know that Icahn probably started buying Apple shares after it started rebounding from its sub $400 level. He was maybe a month late. On the other hand, Jim Roumell was 7 months early in buying Apple shares. He managed to lower his average cost because he was confident enough to add to his holdings. "We knew each time we were paying less and less for the actual business because the balance sheet stays the same. We want things that we can easily and comfortably add to if they go 25% against us" he explained.

Today, Carl Icahn is still bullish on Apple. He thinks the stock has a long way to go and is worth at least $200 if not more.

Jim Roumell is contrarian and he is aware of the fact that Apple is "now a popular security again". He says Apple may still be undervalued but they seem to execute and the stock can no longer be described as out of favor. He acknowledges that they just came off of a phenomenal iPhone 6 sales period and the company has a very strong ecosystem. However, he thinks Apple is still a hardware company and he would value it at 11 or 12 times earnings plus cash. The company is currently trading near these values and there is no margin of safety for investors. He says "it could still work but the easy money is made. We don't pretend to know enough about trying to predict future sales cycles on Apple. At the price we bought it we just didn't think we have to get a whole lot right."

Roumell recently sold his Apple shares. He was early buying Apple shares, so it is likely that he is a little bit early selling Apple shares. Apple was the most popular stock among hedge funds at the end of the third quarter (see the complete rankings). In 10 days we will find out what other hedge funds are doing with their Apple holdings. Other notable hedge fund managers with large Apple positions to watch are David Einhorn and Philippe Laffont. We think Apple will maintain its popularity and this isn't the right time to sell Apple shares.