Merrill Lynch’s Mohan Downgrades Apple Again


It seems that every time Apple’s stock price outperforms Wamsi Mohan’s’ view of the company’s near-term performance, he sees it as no longer a buy.

In spite of Apple’s rising to becoming the world’s most valuable stock, where it has grown over 95,000% in the last 22 years, the road there has been paved with many downgrades, where analysts have been skeptical about the company being able to keep pace with its stock growth and this being forwarded as a reason to look elsewhere to grow your money.

Merrill Lynch analyst Wamsi Mohan has been leading the charge, seeing it overpriced at $137 in 2016, $209 in late 2018, and perhaps especially at its current price of $440 a share. Mohan is not alone in his bearish views of this phenom over the years, nor is Apple singled out that much as being portrayed as a stock that moves in a way that these analysts really do not understand. This does not have all that much to do with Apple particularly as it does with how these analysts interpret the world.

Seeing a downgrade from a fundamental analyst when the growth in fundamentals with a company really falls behind the growth in its stock price particularly messes with the minds of these analysts, although their rationale behind their reticence with stocks that move particularly well over time is transparent enough.

People still may marvel at how Apple is seen as so overpriced that investors are told that it is not a buy at various times but it manages to ignore the protests of Mohan and other analysts and just keeps going up anyway. The most curious thing about this is how they so stubbornly persist in sticking to their beliefs in the face of their being so wrong so often, and do not even seem to notice that they have been trying to steer investors away from what has turned out to be simply fabulous opportunities, as investing in Apple has been for instance.

In an interview on Wednesday, Mohan summed up the misunderstanding behind these mistakes in a way that actually tells all by using a single word, although to get the significance of this, we do need a basic understanding of how stocks work, and especially understand the real forces behind Apple’s meteoric rise from the equivalent of 46 cents a share in 1998 to being worth almost a thousand times more today.

The word Mohan used is “investor,” as in investors are seeing how the stock price of Apple is moving further away from where he sees Apple’s business performance going in the next year and therefore this will cause the rise in Apple’s stock to make it so uncompetitive with other stocks that it deserves a neutral rating once again.

We need to define “investor” in the way that Mohan is using it, and this does not mean anyone who ends up buying Apple, it instead means investors who are investing based upon fundamentals, which we could have assumed anyway but is made particularly plain when he tells us that investors are reaching their levels of tolerance as far as Apple’s stock price and their forward earnings projections are concerned, in his mind anyway.

There are investors who do pay attention to these things, as one of the things they may look at, but even investors who base their decisions on fundamentals often use other criteria, as to rely on fundamental data alone would have us ignoring price data altogether, if we are just basing our decisions on this one thing. Even Mohan looks at charts, but he is trying to make the claim that the price of a stock is only driven by these other things, a view very far from reality as it turns out.

Investor is a poor word choice here as it turns out, as people use a variety of strategies over a very wide range of holding expectations when they speculate on the future price of a security, and simply changing investor to speculator sheds a lot of light on the misunderstanding that has these analysts on the wrong side of what really goes on so much.

We often speak of how wayward the view of trying to understand a stock’s price exclusively by way of how it stacks up to a company’s present earnings or their near-term expectations are, the concern that the ratio with what Mohan sees as their near-term earnings prospects are, where this earnings growth isn’t keeping up with its growing stock price.

What We Speculate on is What Matters, Not What Some Think We Speculate On

Mohan explicitly telling us that “investors” won’t want to go beyond a number like 30 times forward earnings does present a nice opportunity to further expose the flaws in this view, and in particular, how changing what we call these people to speculators can serve to have us wonder more what exactly they are speculating on, and it’s not speculating on near-term fundamentals.

If this was what people actually speculated on, Mohan’s analysis would at least do no harm, where things don’t look that great on the fundamental side, the market recognizes this, and trades sideways as a result. Unfortunately for him, that’s not how the market prices stocks, and not even close.

We just got the latest fundamental data from Apple, and it is no secret that markets find these reports influential when they came out, and this latest one sure is. We don’t even have to look at the actual numbers here, we can and definitely should be just looking at the market’s reaction, because it’s not what we think that matters, it’s always completely about what the market thinks.

In the leadup to this announcement, Apple traded around $373 a share, and went from this to $440 in the aftermath, a gain of 18% in just a week. They saw the earnings report, they loved it, and put Apple’s price to earnings ratio up even more.

This includes fully accounting for Apple’s earnings growth over the last quarter as well as their near-term earnings and business outlook, and not only use this earnings growth to set a higher price, but to increase its price to earnings multiple from 27 to 33 times current earnings.

If P/E multiples were such a constraint on stock prices, and are especially thought to be as a stock’s multiple moves further up from the market average, we would see stocks with higher multiples do less well than average, but the opposite is true, even though some may not even bother to test the validity of their ideas, as perverted as they may be.

There are indeed investors who have a similar mindset as these analysts and will sell when P/E gets too high for their tastes, and especially will be reluctant to enter new positions, but somehow, Apple’s stock price moves forward anyway, and it’s because those who care get overwhelmed by those who do not.

Halloween costumes might scare a few adults, but most aren’t going to be running for their life by seeing a kid with a pumpkin head on, so we have to base our assumptions on looking to see what the consensus really is and not just try to make things up that are not real. We might think higher P/E’s scare, but we need to dare to check, to at least peek out of the corner of our eye to see the mob that these things don’t scare and maybe even realize that we have been proven horribly wrong.

This 18% gain was not driven by people who think Apple is overpriced, it happened in spite of the impact of these investors, who try to exert downward pressure during these times and any effect they would have would be limiting. This move came from a different sort of investor, investors that are speculating on something else, investors that are missing from Mohan’s model but are the big crowd behind these moves and isn’t something you want to leave out of your understanding of this phenomenon.

These Concerns of Mohan’s Have Already Been Vetted by the Market

The results are in, and whatever issues that the company may be facing, whatever they may be, which are actually of no importance in themselves, the market has voted to keep the stock’s price rising, and voted for this in a big way, and that cannot be sensibly ignored.

We might wish to pick apart a company’s near-term prospects, where they may sell less phones for instance, and try to position these things as negatives, but this is simply foolish if the market disagrees with you, as they have the only say in these matters. There isn’t even a reason to discuss why Mohan thinks Apple’s near-term outlook is so undesirable that it gets thrown into the neutral category, placing one of the strongest stocks in the market alongside stocks that are utter garbage where neutral really means weak and all sorts of crappy stocks remain a “buy.”

If Apple isn’t a buy, it’s even hard to imagine what would be in comparison, as this sets the bar well beyond the fussiest of the fussy, even ourselves who only like stocks like Apple or of a similar great quality generally. If you can choose between the great, the good, the mediocre, or the terrible, it only makes sense to choose the great, and Apple is great if anything is. While there are a few stocks which are performing better, there aren’t many, and they are the sort of stocks that fundamental analysts take a similarly dim view of because their price to earnings are too high for their tastes.

Mohan does see several stocks in the sector as buys, including IBM. Preferring a stock like IBM over a stock like Apple is just bizarre, and while we can find some pretty exciting plays in the technology sector that you could at least argue may be better contenders for our money than Apple, IBM certainly isn’t one of them, and very far from it.

This is a stock that has been in a decline for the last 7 years where it has given back over a third of its value instead of going up, where we even have to wonder when this fall stops, let alone get to a point where it may be expected to appreciate in value enough to want to own it, when it may become great again or even something else besides bad.

To get a taste of where these stocks have gone over the last few years, IBM hasn’t hit a new high since March 17, 2013 at $215.82. Apple on that date in 2013 could have been had for $65.98. IBM has slumped to $125.84 now, a loss of 42%. Apple is now up to $440.25 with a gain of 567%.

While we don’t just want to look to a stock’s history like this, as a stock can both explode out of its historical ranges and another can just collapse, it is Apple that has been exploding lately and IBM’s stock dying a slow death. When we look toward the future, it is Apple’s that is extremely bright and IBMs that looks like they have peaked long ago, in the early days of computing when they were the biggest kid on the block and were actually growing in spurts. They have gotten old and weak since.

IBM has levelled off after taking a tumble earlier in the year and has come back somewhat, but still sets off 21% from where it was in February before all this. Apple is up 37% from its February high, and the very idea that these two stocks would even be in the same conversation is crazy enough, but seeing IBM as the buy and Apple not a buy takes us to another level of crazy altogether.

Of all the stocks that Mohan is following, only Apple merits a neutral, and only one of these stocks has a lower rating, with his seeing Seagate as a sell. Seagate is a terrible stock these days and deserves its sell rating, but it had a great year in 2019 where it gained 54% and its hard times have been this year, where IBM has been hurting for a lot longer. Both belong in the garbage bin right now, but Apple sure doesn’t.

Just when you might have thought that this rating could not get any crazier, Mohan downgraded Apple and also raised his price target from $420 to $470. He got the $420 right and was on a roll, and the $470 looks pretty reasonable as well if not for Apple’s amped up potential. These analysts never really tell us how far out these targets are, but they are usually 6 months to a year in duration, and Apple going from $440 to $470 might not be as exciting as this stock has been, and may be understating its potential, but this still looks pretty good compared to what most stocks will probably do over this time.

We would love to think that this comparatively modest growth expectation would be seen by an analyst as too pedestrian to even bother with, where he may be setting his sights on stocks that are going up even more, although few stocks are doing that now, a neutral with these people means that these stocks really are hands off, where even a lot of their buy recommendations, like IBM and others, are ones that aren’t good enough to ever buy or want to hold either.

If your stock ratings are derived while sitting on a toadstool and contemplating a lemon meringue sky, your recommendations can also look like they come from Neverland as well. We have no idea what he sees in IBM, but the market does not like this stock and has continued to sell it, not buy it in spite of his pleading. They do buy Apple though and they buy it at a higher rate than he envisions when he looks at its near-term business prospects.

If we really want to know whether a stock is a buy or a sell, we need to look at what people are doing. If they want to buy it more than sell it, its price goes up. If things are relatively equal, that’s what we would want to call normal. If they desire to sell it more, the price will go down. This is grade school level stuff, not trying to earn a PhD by trying to turn lead into gold and then thinking you’ve done it because your vision has become so dim.

These speculators aren’t speculating on the next quarter for Apple, they are speculating on its potential over a much longer period of time than this generally. Investors are looking many years down the road in fact and the issues that Mohan sees affecting its price in the short run doesn’t concern them much, and to the degree that they do, they have already voted on this outlook and voted a resounding yes to it and everything else that could matter, with the current boost the stock has had since this earnings call.

It sure would be simpler if we could look to value stocks without having to bother with the market, and just pretend that it doesn’t exist and the forces of supply and demand that determine a stock’s price don’t mean anything. All we would have to do is look at a stock’s price and, if we were right, we could correctly predict that it will never move, because we’ve excluded the things that move it. We aren’t right and it does move and we are ignoring everything that moves it, so no wonder we get so lost with this approach.

What is so special about Apple and the other 2020 high flyers is that the field of good performing stocks have been thinned out so much that there’s a lot fewer of them to want to put our money in if we actually are looking for real good returns right now. This is something that actually puts stock prices up, in comparison with a company’s outlook that has already been priced in and has no effect on its stock price beyond whatever change this outlook produces when it is shared with us.

If analysts can manage to make the trip back from the land of confusion, they may come to realize that stocks actually do go up and down based upon how much or how little people are willing to pay for them. They will also wake up to the fact that “investors” speculate not on the company essentially, but on the stock itself.

While some investors may sell because they see the P/E go over 30 or whatever is happening with it, if we see the price continue to move forward, and especially by the amount Apple is moving, this stuff just isn’t mattering. If you base your analysis on what does not matter, your analysis won’t matter either.



Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.

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