Is Potential Tax Reform Pushing Apple Short Interest Lower?

Print Email

Short interest in Apple Inc. (NASDAQ: AAPL) fell by nearly 4% in the two-week reporting period ended September 29. Some 38.04 million Apple shares were short, or about 0.7% of the company’s float. The days to cover reading was one, at average daily volume of about 34.11 million shares traded.

Short interest in Apple hit a 12-month low in this period, after continually pushing lower since hitting a 52-week high of 63.20 million in late May. Short interest has decreased by about 20% for the year to date.

Although this is one of the lower levels for the iPhone giant’s short interest, Apple still ranks among the most shorted Nasdaq stocks.

Perhaps Apple short interest could be shrinking as talks of tax reform become more prevalent. This company has been the subject of much scrutiny in how it deals with its taxes, or as some law makers would say, avoids its taxes.

In a recent report, Merrill Lynch maintained its Buy rating for Apple based on expected strength of the iPhone X cycle, a significant cash balance that affords optionality to enter new markets, and a continuing strong cash return program. However, tax reform did play a role in this report as well.

The brokerage firm looked at two aspects of potential tax law reform and their implications on Apple, while acknowledging that there is significant uncertainty around ultimate legislation. First, Merrill Lynch considered a lowering of the repatriation tax on foreign earnings from 35% to 8.75% for earnings held in cash. Second, it looked at future EPS benefit from a lowering of the U.S. statutory tax rate from 35% to 20%, combined with the removal of interest deductibility.

Merrill Lynch concluded that:

  • Existing deferred tax liability on the balance sheet could allow for substantially all of Apple’s foreign cash to be repatriated to the U.S. if the repatriation tax rate is reduced to 8.75%.
  • Lowering the U.S. statutory tax rate to 20% would be about $1.00 accretive to earnings.

Shares of Apple were last seen at $155.80, with a consensus analyst price target of $173.18 and a 52-week range of $104.08 to $164.94.