At a quick glance the two multi-year stock charts below look eerily similar. In the period 1996 to 2003 the stock shown below first languished while posting losses. It then surged by more than 330% (and to 41 times earnings) as fundamentals blossomed.
Fiscal year 2001 saw profits slip completely away. The shares took a sickening plunge of about 80%. That was followed by three years of middling share price gains. Buy and hold investors made a less-than-stellar 33% cumulative return if they toughed it out for the full eight years.
The second chart (depicting 2004 to the present) is almost a mirror image of the earlier one. Years of so-so stock price movement preceded a huge run-up on accelerating EPS growth. This time around the shares crashed hard even though earnings kept growing nicely for a couple of more years.
Those who bought at the start of 2004 had a chance at 1183% gains if they correctly called the top. The stock peaked at about 43x current year EPS. Traders still hanging in there today are sitting on close to 43% paper losses dating back to Jan. 2, 2004.
What was this mystery company? It was actually two different ones.
The first chart is Apple’s (NASDAQ:AAPL). The second is for Research-In-Motion (RIMM).
AAPL reinvented and rejuvenated itself with their development of the iPod, iPhone and iPad. Unless you were well connected to Apple’s R&D department it would have been pretty hard to have forecast Apple’s ultimate profit rampage.
When RIMM was flying high it was the leader in business smart phones. Blackberries looked to hold unassailable market share before iPhones and Android appeared on the scene.
Leapfrogging by rival tech companies is an old story. Panasonic’s VHS killed Sony’s Beta-Max. Music CDs made cassettes obsolete. Digital downloads are now pushing compact discs towards the scrap heap.
Many people look at Apple’s relatively low P/E as a gift that will definitely keep on giving. History tells us to be careful with technology investments. Things can change quickly and often with little-to-no advance warning.
Apple lovers please hold the hate mail. I’m not predicting AAPL’s demise. Back in 2007, though, RIMM was one of America’s most-recommended stocks. There were few concerns regarding RIMM’s market-leading position.
It’s fine to play with high tech companies. Just be sure to stay alert and always keep one eye on the door.
Disclosure: No positions in any stock mentioned
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