Apple Inc. (AAPL)’s Capital Allocation Miss

Apple Inc. (NASDAQ:AAPL) investors have been in for a wild ride. As the market hits new highs, Apple Inc. (NASDAQ:AAPL) is finding new 52-week lows.

Some say its because of Apple’s transition to a value stock from a growth name. Others say its the on-going battle with David Einhorn about a preferred dividend straight out of a financial engineering book.

I think it’s just capital allocation, and nothing more.

Where Apple missed

The belief that Apple Inc. (NASDAQ:AAPL) needs huge amounts of cash for investment purposes – primarily to buy new product – is folly. The company best known for the iPhone runs on negative working capital, selling its devices and collecting payments before it even begins to think about paying suppliers.

So much of the cash and securities Apple Inc. (NASDAQ:AAPL) owns are, as far as the business goes, completely dead weight.

More importantly, Apple’s holdings are dragging down the company’s potential performance. Investors should look closely into the latest quarterly report to see what Apple owns.

Here’s a snapshot:

What do you see? Poorly-performing security after poorly-performing security.

A simple allocation shift for a higher valuation

Fixed-income is a drag on investors who want equity exposure. While Apple’s stock price sank in the last six months, the company’s investments failed to keep pace with the rising tide of the equity markets.

Apple Inc. (NASDAQ:AAPL) could make things easier for investors who want equity returns: move money into equities. Let Apple’s cash sit in something more exciting than corporate bonds and mortgage-backed securities. At the end of the day, investors aren’t worried about the cash coming back as much as they’re worried about the company dragging down its business performance because of its poor investment habits.

Moving into equities solves three basic fundamental problems:

1. Increasing the return on the company’s retained earnings, which are currently being invested in low-return securities, dragging down the company while the market is up.

2. Satisfying investors demand for equity exposure without requiring the company to move cash back to the United States. The company’s “hedge fund,” Braeburn, was invented solely for the purpose of allowing Apple Inc. (NASDAQ:AAPL) to invest its overseas earnings in marketable securities without paying taxes to repatriate its building reserves.