Thread by @JacobsRaffy

Apple Supplier Rumor: An Awesome Short Entry Point

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Summary

Apple investors expect to see the company's primary supplier facilities in China reopened in February.

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For many reasons, this is unlikely. Even if it is true, the supply chain for Apple's iPhones will be held back.

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This and analyst optimism with questionable origins provide investors with a great opportunity to "sell the rumor."

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Analysts Say "Buy," But Don't Raise Price Targets
It seems as though every instance of bad news about Apple is quickly followed by highly publicized bullish analyst statements attempting. $AAPL

Last week's tangible bad news, ranging from the virus's entrance to the news cycle to the resultant closing of Apple suppliers in China, was quickly followed with bullish reports from Morgan Stanley analysts, Deutsche Bank analysts, Wedbush analysts, and Goldman analysts. $AAPL

Curiously, none of these analyst releases came with upgrades or higher price targets.

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Not to be a conspiracy theorist, but could it be that these companies are attempting to keep prices high so that they and their clients can safely liquidate their positions, while AAPL is near an all-time high? I make money from being suspicious of analysts. $AAPL

When reality says things are bad, and analysts say things are good, I tend to look for a possible short play.
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Apple generates one-fourth of its operating profits from China. Its supply chain is also mainly in China. Of the Dow companies, Apple is the most exposed to a Chinese economic problem.

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Just How Bad Is It?
One analyst stated that 2019-nCoV will only have a 10% impact on iPhone shipments. $AAPL

Again, I find analyst comments hard to believe, as their main constituents are their own clients. Public companies are a bit more trustworthy, as they must act to benefit investors.

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Case in point, Sony (NYSE:SNE), a supplier to Apple, has given a much more dire warning. The word Sony's CFO used in regard to the impact of 2019-nCoV on its smartphone image sensor supply was "enormous," $AAPL

which is not a word that describes "10%." Sony holds 70% of the market share in this category.

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That is, even if Apple is to see its primary supplier facilities in China (e.g., Honghai and Pegatron) re-open in February, the supplier bottleneck problem will nonetheless remain unsolved. $AAPL

Notably, Apple suppliers produce iPhones in Guangdong, which is roughly 500mi from Hubei, the 2019-nVoC epicenter. Guangdong is the second most affected province in China and the first province outside Hubei to have 1,000 confirmed infections. $AAPL

Apple's Factories About to Be Quarantined
More importantly, the majority of iPhone manufacturing takes place in the city of Shenzhen. I suspect that Shenzhen will be locked down by the time I publish this article. $AAPL

Guangzhou, another big Guangdong city, was just put under quarantine at the time of writing this. [Source: here, in Chinese. English sources should be out by the time of publication. (I am fluent in Chinese.)]
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You can reach Shenzhen in 30 minutes from Guangzhou. Many people - certainly including the infected - have already headed to Shenzhen to seek the superior medical services and less draconian measures in Hong Kong. $AAPL

Hong Kong is a mere 20mi south of Shenzhen, and the latter acts as the border town for the former. $AAPL

Ultimately, my thesis is that:

Apple stock is being buttressed by overly optimistic, possibly naïve analysts, and this situation might involve Apple's suppliers as well as the government of China.
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The 2019-nCoV situation is exacerbating. Shenzhen, the location of Apple's suppliers, is by no means an oasis but instead one of the most dangerous areas in China. The situation is worsening, making the timing of the re-opening announcement suspect.
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Apple's high amount of exposure to China makes it highly vulnerable to the economic troubles related to the coronavirus.
Apple's suppliers are highly unlikely to re-open their factories in Shenzhen due to the true dangers of the situation. $AAPL

This is a great opportunity to sell the rumor.
Ignore the analysts' spin. Hedge AAPL now to protect your position. Short AAPL now for a good speculative short play, and possibly walk away rich. I'd do it with options because we can do so with an upside hedge inside:
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Sell Jul17 $400 call - 250
Buy Feb14 $330 call - 110
Sell Feb14 $322.50 put - 570
Sell Mar27 $300 put - 510
Buy 2x Mar27 $320 puts - 2290
Buy Feb21 $315 put - 400
Total cost: Roughly $1990, as of Feb7.

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