Is Apple (AAPL) the short of a lifetime?

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many traders and investors are looking for a trading strategy that will create more than just usual returns. Many wished they had bought into companies like Google (GOOG) and Microsoft (MSFT) before the big boom in the 90's. There have been other industries that while not nearly as inflated as many of the .com stocks, have achieved huge returns.

But traders could have made as much or more by shorting near the peak, as they could have if they were long from the beginning. The contrarian view is not new, but it's also not popular.

One reason why it's better to be a contrarian

Mathematically you have more data to calculate a retracement. If a stock moves from 10 to 100, and 100 is the identified peak, you have an area where you can calculate a retracement based on whatever methodology you use. That is not the case for a breakout, when you are long and the market is going up, how do you know when to get out? This is nearly a more difficult problem than knowing when to enter.

Apple (AAPL) Problems

Analysts have recently downgraded Apple (AAPL) stock due to 'long term problems' - the key word there being term. Apple's on life support, being supported by the "Cult of Mac" which will not always be enough to sustain Apple at current nose bleed levels.

One of Apple's major suppliers, Foxconn, is the classic example of what previously were known as 'sweat shops' but in this case, workers actually jumping to their deaths, supposedly because of the horrible conditions. This recently culminated in a worker riot. Certainly Foxconn is not a unique example of the general conditions of factory workers in China and other countries. The question is, why is Apple using such a company? Why doesn't Apple manufacture it's own electronics, they are supposedly a computer company? And not to be pushy, but why don't they manufacture them in Wyoming or New Mexico, considering the US is facing a major unemployment problem.

Jobs was known as a bit of a slave driver, but the question is that without the use of such facilities, would Apple still be profitable? Maybe, but certainly not as profitable as it has been.

Design flaws

Their latest product, the iPhone 5, has major design flaws.

Apple's latest smartphone, the iPhone 5 is suffering from some minor but concerning design flaws. According to many users, who have complained on a website known as 'Macrumors', the aluminum shell of the iPhone 5 they brought has scratches and is being chipped, right out of the box.

The design flaws go beyond the iPhone 5. Apple's software is full of bugs as well as having what users are calling an old design. Why have notepad look like a yellow pad when yellow pad are rarely used anymore?

Apple's software, while the best in the world, still has flaws that aren't skin deep, says Kontra: "Apple software - especially its self-declared future, iOS - needs some serious overhaul both in aesthetics and experience, and far more in the latter department."

Then there was the maps disaster.

Apple Maps has rapidly become a bigger joke in technology than RIM, and that's saying something. Whether it's a Tumblr making fun of its inaccuracies, or just the fact that it's become part of every hacky comedian's repetoire, it's a rare misstep for a company not noted for making them

The last generation iPhone had an infamous antenna problem, that was solved by suggesting users use 'duct tape'. The list goes on and on, some obviously more significant than others. There seems to be a trend forming, and a rapid increase since the departure of Jobs. This is not unusual for a large tech company to go through. Microsoft has struggled to get it's share price significantly higher in 10 years. The difference with Apple the debate is still apparently out if it's overbought, if they have saturated their business model. To some in technology it's clear; they've peaked. That isn't necessarily a bad thing, or an attack on Apple . When Apple was founded in 1976, they were a mere blip on the technology radar. Other companies at the time such as IBM (IBM) DEC acquired by HP (HP) needed to make room for the new upstart. True, in 1976 consumer electronics were rare. It was this niche that Apple carved creating a new industry, the Personal Computer. That new blue ocean is what shot Apple price skyrocketing over a period of decades. This is part of the reason why it can't continue to skyrocket, they are riding on the generational momentum and their own cult followers. By releasing the iPhone, Apple was capitalizing on it's existing following in the new blue ocean market; mobile.

We know this, but what will be the next blue ocean market Apple will dominate, recreating the business success it had with mobile?

That question becomes more and more significant as design flaws grow.

No more Jobs

With Steve Jobs gone, can Apple really survive without him? Of course the company has grown into a huge global tech powerhouse, but we all remember what happened to the company last time he was fired.

Author Paul Turner has similar concerns:

But can Apple really survive without Steve Jobs in charge?

The argument of my new book "Insanely Doomed" is that it can't.

There are two types of entrepreneur. A man such as Henry Ford creates an entirely new system for making things. Once he was gone, the system endured, and Ford could carry on as the leader of the global auto industry for decades afterwards.

By contrast, a man such as Dr An Wang just creates a whole series of fantastic products - from calculators to word processors.

Wang who, I hear you ask? Well, that is precisely the point. It was one of the most significant companies of the technology industry in the 1970s and 1980s - but faded away once its founding genius was no longer in charge.

Apple's shady past

Cult followers also forget that Apple went through a decline from 1986 - 1997 where they were just another computer company, with only a few good products like the Macintosh LC. Their bitterness shifted their focus to sue their brethren Microsoft for stealing their GUI, even though they obtained it from Xerox (albeit legally).

Microsoft continued to gain market share with Windows focusing on delivering software to cheap commodity personal computers while Apple was delivering a richly engineered, but expensive, experience.[58]Apple relied on high profit margins and never developed a clear response. Instead, they sued Microsoft for using a graphical user interface similar to the Apple Lisa in Apple Computer, Inc. v. Microsoft Corporation.[59] The lawsuit dragged on for years before it was finally dismissed. At the same time, a series of major product flops and missed deadlines sullied Apple's reputation, and Sculley was replaced as CEO by Michael Spindler.[60]

What brought Apple out of this was the success of the iMac, which led to a decade long product series and huge success. This can be credited largely to design, led by Jonathan Ive. The question being was it Apple or "Jony" who can be credited with Apple's recovery? Or was it simply a booming market, 1998 was near the upward peak of .com boom.

There are so many possibilities for Apple in the future to regain their dominance of a blue ocean market. But the momentum seems to be against them; with a large declining company that has saturated its markets, and a series of design flaws, it would take significantly more energy to reverse this trend while they are only one big disaster from another 10% drop.

Apple Stock Short

There are a few plays here. Apple is down of it's highs already, and probably will not continue much further below in the short term. If you already own it, you can consider getting out. Just on a speculative level, a few simple strategies outlined below:

Option 1: Sell on spikes

When news driven or short covering drive Apple up in a day, it's a good time to sell.

Option 2: Buy a deep out of the money put

This will provide the best return on investment, as deep out of the money puts (such as below 400) are extremely cheap. Your cost is known (the cost of the option) but the upside is theoretically unlimited if the stock declines. The only problem here is finding puts as far out as possible, as a big decline is likely to happen over the long time frame rather than in a week or a month. The strategy here is to buy a put as far out as possible. Remember if you change your mind in 3 months you can always sell it.

Apple Technology

This article is simply for stock traders and investors; many believe that Apple is overpriced, over-hyped, and simply overbought. That doesn't mean Apple is a bad company, or that we shouldn't enjoy their products. They make great toys and gadgets, are popular in the entertainment industry, and they even have a little server product! Let's all hope they continue to make great products for "Moms and Dads."

Joseph Gelet has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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