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Why Did This Hedge Fund Bet Against Apple Inc (AAPL)?

Apple Inc. (NASDAQ:AAPL) is one of the hedge fund industry’s favorite stocks. That still doesn’t mean that the tech giant doesn’t have its fair share of critics. Enter Philippe Jabre. Jabre is the manager of Jabre Capital Partners, a Geneva-based hedge fund with over $1.4 billion in assets under management. Before founding the fund in 2006, Jabre worked as a managing director at GLG Partners in the U.K., and prior to that, he served as a convertible arbitrage specialist at BNP Paribas. While Jabre Capital Partners opened amid fears of higher-than-normal regulatory risk, the fund was able to shrug off these concerns, generating returns in excess of 10% in its first year of operation.

Philippe Jabre

In his spare time, the hedge fund manager is known to be “an extreme skier with a taste for Havana cigars and high-stakes trades,” though it’s not all fun and games for Jabre, as it is rumored that he picked Geneva, Switzerland as his fund’s HQ so he could put in “20-hour work days” in peace.

Living up to his reputation as being a high-risk, high-reward manager, his most recent 13F filings indicate that he has been one of the industry’s biggest Apple Inc. (NASDAQ:AAPL) bears in recent months. As seen here, Jabre Capital Partners owned $116.8 million worth of put options at the end of this year’s second quarter, a value worth more than 16% of his portfolio. The value of these options contracts was nearly thrice as large as his largest long-only position in Wells Fargo & Company (NYSE:WFC) at 6.2%, an interesting situation indeed. While it remains to be seen exactly when and if Jabre exercised these options, it’s worth exploring the potential reasoning behind his bearish bet.

In the three weeks of trading since this position was reported to the SEC, shares of Apple did return -1.6%, as the company reported disappointing third-quarter earnings on July 24th, while issuing Q4 guidance below analysts’ estimates. While its quarterly EPS figure was up 19.6% on a year-over-year basis, the tech giant still missed the Street’s estimates of $10.35 a share, reaching earnings of just $9.32 a share.

By the end of this year, Apple is expected to report an EPS of $43.92, which is still a 58.7% increase from its 2011 totals. Year-end estimates for 2013 EPS are in the $53.00 range, with a high mark of $63.05 a share. If this growth can be reached, it is possible that the company can generate above-average appreciation over the next 12-16 months.

This is because Apple Inc. (NASDAQ:AAPL) is trading at a discount nearly everyway you slice the numbers. From an earnings standpoint, the stock sports a Price-to-Earnings ratio of 15.7X, below its own 5-year historical average (21.9X), and its most comparable competitor Google Inc. (NASDAQ:GOOG), which trades at 20.4 times its earnings. Despite the fact that the company has generated otherworldly bottom line (59.8%) growth since the recession, shares of Apple still trade at a 5-year expected PEG ratio of 0.67; typically any figure below 1.0 signals an undervaluation. Moreover, this ratio is also below top-tech peers like Google (1.07), Microsoft Corporation (NASDAQ:MSFT) at 1.19, Hewlett-Packard Company (NYSE:HPQ) at 1.64, and International Business Machines Corp. (NYSE:IBM) at 1.24.

While the aforementioned comparisons are likely enough to conclude that Apple looks like a bargain at current levels, we’ll take it one step further, by looking at the company’s cash hoard. Over the past three years, Apple has grown its operating (413.3%) and free (365.8%) cash flows by impressive rates, though it currently trades at 12.1 times its cash flow, slightly off its 5-year average (12.5X) and below the likes of Google (14.3X).

Aside from these advantages, Apple still has an enormous opportunity in China, which we’ve already speculated could push its stock price past the vaunted $1,000 mark, though an agreement with China Mobile Ltd. (NYSE:CHL) isn’t an absolute certainty. The risk of these two sides not reaching a deal is not the only thing fueling bearish bets like Philippe Jabre’s; the company’s newest iPhone may just serve as a useful upgrade to the 4S rather than a truly world-beating innovation – which is the primary reason why Apple has reached its current heights.

To see the entire hedge fund industry’s sentiment toward Apple Inc. (NASDAQ:AAPL), continue reading here; if you’re interested in taking a look at Philippe Jabre’s entire portfolio, this is a great place to start.

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