Tags: Apple | Einhorn | cash | stock

Einhorn Pushing for Apple to Collapse

Wednesday, 13 Feb 2013 07:42 AM

By Michael Carr

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Short-term market moves are driven by emotions, but in the long term, only the fundamentals matter. Apple moved up when activist investor David Einhorn sued the company in an effort to unlock Apple’s large cash pile. This emotional response does nothing to change the long-term, slow-growth prospects of Apple.

There is no disputing that Einhorn has an incredible track record. His hedge fund gained 7.9 percent last year and has averaged 19.4 percent a year since 1996. The Standard & Poor’s 500 gained an average of 4.73 percent a year over that time.

Einhorn has been an Apple investor since 2010, when the stock traded at an average price of $267.50. His lawsuit seems like an effort to act in the best interest of his shareholder’s rather than Apple’s.

Every dollar Apple distributes to investors lowers the company’s value to investors in the future. This reality is why Warren Buffett doesn’t pay dividends at Berkshire Hathaway. Buffett has written that dividends are only justified when a company cannot profitably invest the cash and deliver superior gains to the shareholder.

Apple may have too much cash, but the decision of how to invest should be made by the company rather than an investor who is sitting on a potential gain of 100 percent. It is estimated that Apple has about $137 billion in cash on its balance sheet, equivalent to about $140 a share.

Assuming Apple made a distribution of $100 per share, the stock price would fall $100 because that is how the accounting for large distributions works. There is no creation of company wealth when it distributes cash, so the stock’s price falls.

Einhorn would probably still be ahead if Apple distributed $100 and fell to $375 a share. Investors who bought after him would not benefit. Ordinary investors would owe taxes on a dividend. The only good news is that they could probably offset that income by taking a loss on the stock that would likely be trading below their purchase price.

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