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New Stock Picks: Long Apple (AAPL) & Short Blue Nile (NILE)
Posted by: Intelligent Speculator (IP Logged)
Date: January 5, 2012 07:52AM

Wow, this feels good. Even writing the title of this post had a nice feeling. Why? Because I have not had the opportunity to open a new technology long and short stock pick since last August. There were logical reasons behind that and I have to say that things did work out for the best last year. A total return of over 70% is well beyond what I would normally expect out of these trades and while the 2010 return had been very solid, last year was a homerun. That being said, I did take a few resolutions to improve my trading. Not only that, I also did promise to be more accurate and transparent with all of you. Feel free to get on my back if you that things are not as good as they should.

Since this blog is far from being only about tech stocks, I did also open a new mailing list where I will discuss my trades and thoughts on other stocks, it is free to join, see the details here.

Today I will be opening my first trade with a few more coming in the next few days..!

Back To Making Money

Sure I am nervous about getting back on the horse but more than anything, I’m ready to put myself back out there, open some trades and hopefully make some money in the process. As is always the case, I caution all of you to do your own research these are my beliefs and my numbers. No one should be surprised to see that my first trade involves Apple. Not only did I pick the name in the 2012 stock picking competition but I also wrote about the fact that: “You’d be crazy to not own Apple (AAPL)“. Before getting started, let’s take a deeper look at the numbers for both of these stocks:

TickerNamePriceEPSPE RatioPE Next YearReturn YTDSales GrowthAnalyst ratingBook ValueBeta
NILEBlue Nile Inc40.060.9845.9133.82(0.05)10.182.671.811.35
AAPLApple Inc413.4428.0514.8610.571.5465.964.782.451.07


Long Apple (AAPL)

I look at many different things when trying to judge stocks, mostly fundamental metrics such as P/E ratios, growth, etc. When I look at a stock like Apple, it looks cheap in many different ways. Even if Apple’s growth were to slow down considerably, it would still be priced reasonable. And while there is competition for the iPhone (through Android phones) and the iPad (through Amazon’s Kindle fire among others), those are all growing markets. In all of those, even if Apple ended up losing some market share, its revenues (and profits) would still likely increase significantly over the next few years. Talk of an upcoming Apple TV, iCloud and other products will also generate future growth. In the end, I just don’t see how Apple could end up not being a good value at its current price.

The major downside risks are that Apple is such a huge company by now that it becomes very difficult to keep the growth strong. Also, I discussed my intentions to stay away from opening new positions days away from earnings releases. This one is close to my limit as Apple is scheduled to release earnings later this month.




Short Blue Nile (NILE)

It’s amazing! I’m stunned every time that I get the opportunity to look up Blue Nile’s price. Time after time it looks overvalued. As you can see in the list of past trades, it’s far from the first time that I short this stock. It has not worked out well every time, but in general that is exactly what has happened. It’s not that I don’t like the company or event that I don’t like the concept. It’s simply about two companies that sell “stuff” online.

Apple’s stock price is 10.3 times higher than Blue Nile’s. How about earnings per share? A staggering 28 times!! How in the world can this be possible? There is a strong group of investors that seem to believe in the long term prospects of NILE. That might end up being right at some point but I would bet I’ll have made a lot of good trades before that happens. NILE’s sales have been growing slower than Apple for a long time meaning that its P/E ratio should be lower or equal at best. It’s not. In fact, NILE’s P/E ratio is among the highest among the stocks that I follow.

There are certainly risks in shorting a stock like Blue Nile. First off, the stock is very volatile and could trend upward for some time making me hit the stop trade. Another big concern is that NILE has yet to disclose its Q4 earnings, which like most retailers is its biggest quarter. There is certainly a possibility that NILE could have a big number for that last quarter. Enough to account for the difference in valuation? No. But certainly enough to create excitement and some serious buzz.





Disclosure: No positions on Apple (AAPL) or Blue Nile (NILE)



Stocks Discussed: AAPL, NILE,
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