Apple: Cash or Trash?

05/24/2013 9:45 am EST


Keith Fitz-Gerald

Chief Investment Strategist, The Money Map Report

Despite its new, lower price, Keith Fitz-Gerald of Money Morning isn't ready to take a bite. Here are four reasons why.

With Apple (AAPL) off nearly 50% from its $705.07 a share high set last September, many investors want to know if it's a buy.

Not in my book. Here's why:

1. The company has held on to its premium pricing strategy for too long. Going out on price as it has recently with iPhones, for example, is the death knell of competitive differentiation. Businesses that engage in price wars have a very difficult time climbing back up the proverbial ladder.

2. The present management team is having trouble fulfilling the late Steve Jobs' vision, and execution appears to be stumbling.

3. Apple has lost its "head start." The company used to be one to four years ahead of everybody else with every aspect of its design, function, and software, especially when it came to iPads and iPhones. Now they're lucky to have six months...if that.

4. Consumers no longer feel the need to upgrade every time something new comes out. Better, bigger, and cheaper smartphones from Samsung, HTC, and other makers have displaced the "gotta have it" drive for everyday people.

Apple is doomed to go the way of Intel (INTC) and Microsoft (MSFT). Both are quality companies, as is Apple, yet both struggle to produce anything even remotely resembling excitement, and are trapped in their own legacy.

No doubt Apple's business managers are plenty smart, but they've become more cautious, too. Jobs enjoyed-even relished-a certain sense of creative recklessness, and I think that's gone.

Admittedly, I once thought China would pick up the pieces if Apple dropped from the tree, but now I am not certain. A lot has changed there in Apple's world.

The company has had its share of labor problems, and those don't seem to be going away anytime soon. That's led to quality control issues and an unprecedented apology from CEO Tim Cook to the Chinese people, covering both shoddy repairs and warranty policies.

(Never mind that what prompted Cook's apology was a ring of Chinese customers substituting fake parts, declaring they don't work, then submitting the phones for replacement and using the repaired phones to build entirely new iPhones for the black market.)

Beijing is currently cracking down on Apple's App Store, citing objectionable content, including porn and illegal publications. It's also targeting Apple's operations, especially its servers, which are located outside China and therefore a censorship issue for China's infamous "Great Wall" security network.

China has been increasingly reliant on Droid-based technology for the past few years. Whereas Beijing once viewed that as a plus, they increasingly view that as a liability. So they're going to undermine the top dog (i.e. Apple) in an attempt to create more competitive elbow room for homegrown companies like Lenovo (LNVGY) and Huawei.

Apple's penchant for secrecy isn't helping much, and the company has been eviscerated by obviously planted stories in that nation's national media about customer discrimination, corporate hijinks, and patent challenges.

Let's not forget that Apple pulls down approximately $1 billion a week. It's only natural now that Beijing's figured out how much this has "cost" their manufacturing base-and they want a bigger piece of the action.

Apple historically has not cut the pie. And, unless they learn to do so quickly, rising Chinese nationalism may undermine Apple's leadership position, on top of its profits.

Higher fixed costs + higher manufacturing costs + lower pricing = lower margins and lower earnings.

So no...I would not buy Apple.

Read more from Money Morning here...

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