In purely investing terms, represented by the more abstract thoughts above, are you a value investor or a relative momentum buyer? Your answer to this question is crucial. It determines what publications you read, what websites you frequent and your general level of satisfaction with your investing results.
Here’s a fine example today. Some of our clients have owned Apple (AAPL, as if I had to tell you!) and enjoyed a fine ride with it. But today we are all out of it. (Though many of us own, with tight trailing stops, the Technology Select Index, XLK, in which AAPL is 21% of the portfolio, and certain S&P ETFs which attribute 15% of their growth in value this quarter to AAPL.)
Apple (AAPL) is now paying a dividend, they are doing a stock buyback and, yes, this premier American growth company only sells at the same market multiple as the S&P 500. The question becomes: Can they continue to wow us all and bring their sales down to the bottom line in the form of forever-growing earnings? Are they the next IBM, a technology firm that has reinvented itself ever since it was formed in 1912? Or are they, as salesmen used to say in the Go-Go 1960s when touting a new concept stock, “The next Xerox!!” The next Polaroid!!” or “The next Kodak!” Polaroid and so many others soared to magnificent heights, then plunged, then when bankrupt.
For the true believers out there shouting, “This time it’s different,” I agree that AAPL just may be another IBM. AAPL could, like IBM, have enlightened leadership over the years and be willing to re-invent itself along the way. But then I think about Xerox (XRX), which once had every bit as many analysts, technicians and investors singing its praises as AAPL does now. Fickle fellows, all:
If you are a long-suffering holder of XRX, it could be worse. What if you had purchased Juniper Networks (JNPR) a year or so after its IPO?
Or how about Cisco (CSCO) back when it was the “Backbone of the Internet” with no serious competitor in sight?
Or, more recently, Yahoo! (YHOO)...
It isn’t my intent to disparage any of these companies, living or dead. Unlike, say, Enron or Worldcomm, none of them sought to defraud investors or even allow that level of management hubris. Nor am I denigrating Apple; it’s been awfully good to some of us. My point is merely to note that those of us of a certain age have seen it all before; sometimes it ended well and sometimes not so well. Apple may or may not be priced for perfection, but it is certainly well-priced. Forewarned is forearmed and trailing stops are a value investor’s best friend.
Apple has been one fast wabbit this quarter. Most holders of the stock will hold tight, expecting a similar run in the next year (or six weeks). They will read the most favorable news items and reviews of the stock to buttress their conviction and eschew looking at charts like those of the Shiller Data below. I hope it works out for them. Apple may be on their side, but history is not.
As my friend and competitor Sy Harding wrote in his free blog on March 31: “[Apple is] so profitable that if its earnings were left out, S&P 500 earnings for the 4th quarter would have been 3.0% instead of 6.1%. That would double the P/E ratio of the S&P 500, which is touted as still being undervalued… It’s estimated that the 21% earnings increase for the tech sector over the last 12 months was actually only 5% when Apple’s earnings are taken out. The difference is shown in this chart produced by Barclay’s Capital, the blue line being tech sector earnings [ex] Apple.”
Ouch. This says less about Apple than it does about the Nasdaq “rally,” the tech sector and the market in general. I think we’ll be placing more trailing stops, even on our “good stuff.”
Disclosure: We are out of AAPL for now. Apres le deluge, we're happy to take a fresh look at it. If we're wrong, there are always new tech stocks to entice, delight and, occasionally, even to profit from.
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