Thursday, October 04, 2007

How To Slice An Apple

From Sunday's pool party out in the 'burbs:

An old accountant asked me how my stocks were doing these days. Of course I mentioned Apple along with my Brazilian and Chinese plays.

"Heard Apple shares might split soon." he quickly added.

That got me listening closely, of course. I almost coughed up my beer. At first I thought he was asking me. We always talk Apple stock when he sees me. I suspect he owns a few shares himself but he never talks directly about his portfolio.

New York City 08674

He plainly said the split would be entirely about liquidity. There are some on Apple's board that do not like the fact that 70% of AAPL shares are owned by institutions, like university endowment funds, mutual funds, and state worker pension funds. They want to increase the ownership base. Stocks like Exxon (XOM) or BAC (Bank of America) are only 50% or less owned by institutions.

He went on to say, "Splits do impact the liquidity of most stocks. There are always going to be more investors ready to buy 10 shares of AAPL at $80/share than Mom and Pop buyers willing to pay $160/share for only 5 shares. Some Apple directors probably want to make more investors out of those young people wearing iPods."

I normally discount any discussion of splits as a waste of time, even when stocks I own split. Nevertheless, this mature gentleman has worked in Finance for 40 years, mostly managing those funds I mentioned earlier.

I told him I bought the majority of the Apple shares I do own a year or so before the last split.

He said, "Has it been fun to see your investment go from approximately $40 a share to, what? $150 a share? Around 250% gains, right?"

"You bet." I quickly answered.

"Made nearly as much on any other stock?"

That answer took some thought, "Uh, 100% gains on some Level 3 Communications (LVLT) I bought in 2005. A fund I own is up 85% since I bought it. And of course, America Movil (AMX)."

"Have you told anybody else about these stocks?"

"You bet." I said again.

"You just proved another point. Splits are almost free publicity. Small investors talk about splits nearly as much as gains. Yet there is really no value added whatsoever by a split. There's some accounting expenses but they're rather minimal." he added.

"So you really think Apple's gonna split?" I said, trying to prod Abe into giving me more details.

"Yes, I do. Now some of my associates do say with Steve Jobs and Eric Schmidt (GOOG), the Apple board is stacked with people that would rather just see the price go up and up. The options scandals might make Apple's directors shy of any stock price manipulation of any kind. Those are good points but she'll still split soon.
Say didn't you work for Schmidt in a previous position?"

"Yes, you could say I worked under Eric, way under, for a short period after Cambridge Technology was bought by Novell in 2001. I was a Senior Consultant for CTP. I was a certified Novell Netware network instructor and net installer for 6 years prior to 1998, independently, not as an employee of Novell. Novell did give me plenty of referral work when I was with ExecuTrain though.

How soon before Apple splits?" I still wondered.

"It would typically be announced after a major board meeting. But one more thing, don't buy any shares now just because you're thinking two for the price of one. Remember, the math doesn't work that way. Besides, the price will often dip a little just after a split. Some little investors do not read about the split and sell blindly, thinking they missed something drastic. Automatic price triggers can go off too."

"So when should I buy more?"

"On any significant dips, just like always. Watch it like a hawk just after the split. Definitely, definitely buy it before the holiday sales numbers come in...And one more thing, there's the Beatles thing sneaking up, they already have the solo work of Paul, John, George, and Ringo on iTunes, don't they? Once this McCartney divorce is cleaned up those songs will go on iTunes in a heartbeat. You know it. Not really sure how that translates to significant earnings. It would certainly be nice to have an Apple green iPod loaded with every Beatles song available by December. Might introduce more Boomers to iTunes."

At that point he wandered over to the barbecue and I walked over to a group of women. They all wanted to know what Abe and I were just talking about.

"How to slice an apple." I answered.

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