New Trade: Long Apple ($AAPL) & Short Rackspace Hosting ($RAX)

By: ispeculatornew
Date posted: 01.07.2014 (3:00 am) | Write a Comment  (6 Comments)

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Ahhh the nerves are back!! That first trade of the new year is always one that makes me nervous. I’d certainly like to start things off on the right foot so I’m going with a trade that I’m very confident about. Frequent visitors of this blog will likely be able to guess what stock I’m going long here:)

As will be the case all year, my long & short stock picks will be available to see in my live spreadsheet:

http://www.intelligentspeculator.net/livetrades

Long Priceline (PCLN) & Short AOL (AOL) currently stands at +31,97% and will be closed on today’s opening.

Today I’m trading two tech stocks that do seem to have little in common. The similarity though is that even though they are growing at fairly comparable rates in terms of revenues and earnings per share, their valuation seems to be worlds apart.  The short story is:

Apple is making 19 times more revenues/share, 51 times more earnings per share but is only trading 15x higher.

You can see the numbers for both companies here:

TickerNamePriceEPSPE RatioPE Next YearSales GrowthAnalyst ratingBook ValueBetaRevenue/ShareSales 5Y Avg GrowthEPS 5Y Avg Growth  
AAPLApple Inc543.9340.0313.6511.249.24.33137.40.95184.728.629.52
RAXRackspace Hosting Inc36.730.7856.0451.4427.723.67.071.129.6823.126

Long Apple (AAPL)

I’ve generally been very bullish on Apple. Among the stocks that I follow, Apple remains the one trading at the lowest P/E which I simply cannot understand. It has very little downside at these levels and we continue to see strong sales growth and fairly consistent margins which would imply that even without new product categories, its current valuation would be attractive. Add to that rumors of an iWatch, a new iTV, the continue strength of iTunes and you can see why I think Apple is a real bargain at these levels. You can certainly expect Apple to have a strong position in the upcoming 2014 Power Rankings.

AAPL

Next earnings release: January 23rd 2014

Short Rackspace (RAX)

Rackspace is a stock that I had a lot of trouble getting my head around but I’m gradually feeling more confident about it. It’s a good company that is being valued as if its numbers were going to explode. The problem of course is that I don’t see this happening anytime soon. I did already write about my doubts over RAX.  The competition is fierce in the cloud computing sector and it will make it very difficult for RAX to justify its current valuation. A P/E ratio over 50 for a company that is growing revenues in the 20-30% range? I personally don’t see it.

RAX

Next earnings release: February 12th 2014

Disclaimer: Long Apple (AAPL)

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6 Comments

  1. Comment by Johan Lindén — January 11, 2014 @ 10:33 pm

    Hi!

    You talked about a better stop loss solution this year. Any plans on how that will look on this trade and coming trades?

    Thanks!

  2. Comment by IS — January 12, 2014 @ 6:03 pm

    @Johan – To be honest, I’m still thinking about it. I’m not sure changes are needed for winning trades but I’m thinking about being very strict on losing ones. Any thoughts or ideas?

  3. Comment by Johan Lindén — January 14, 2014 @ 1:57 am

    As most successful traders agree upon – it’s more important having a good signal for exit than entry.

    In the case of pairs trade I think an arbitrary stop loss of 5, 10, 15 or 20% might be right. If you allocate 10% of your capital and have a loss of 20% that’s a 2% total loss of capital. Which is usually in the higher spectrum of what is permitted by the big wolves.

    Another important thing is the balance the pairs according to their beta. If you buy stock A (beta 1.0) and stock B (beta 1.5). You should balance so that you own (or short sell) 50% more of stock A. That’s a very important concept in risk management!

  4. Comment by IS — January 14, 2014 @ 12:01 pm

    @Johan – Thanks for the feedback. Yes, that is what I’m thinking about (going back to 20% stop loss) but still going over a few options.

    Yes, I do consider Beta at all times but every time I did look at my overall positions, I had little to no beta exposure so not a huge concern at this point.

  5. Comment by Johan Lindén — January 15, 2014 @ 9:04 pm

    Not sure what you mean with your last sentence. If you don’t balance each pair according to its beta then you will have beta exposure.

    If the stock market loses 1% in a day and you are long Stock A (beta 2.0) and short Stock B (beta 1.0) you will theoretically (or likely) lose 1% on that pair for that day.

    Or did I miss your point?

  6. Comment by IS — January 16, 2014 @ 10:52 am

    Yes, I meant that I look at the beta on all of my trades, and for my portfolio as a whole, but it’s not been significant since starting that (meaning my overall net beta is generally close to 0)

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