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Confessions Of A 9-Year Apple Holder

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iPhone 5 Mockups (Photo credit: methodshop.com)

Too bad the iPhone 5 wasn’t around back in 2007 when Miss South Carolina was asked, "Recent polls have shown that a fifth of Americans can’t locate the U.S. on a world map. Why do you think this is?" Rather than her epic response (the YouTube video has been viewed over 55 million times), which included, "I believe that our education like such as in South Africa, and the Iraq, everywhere like such as," she simply could have answered, "Because they get their map info from the latest must-have offering from Apple Inc.!"

Though even the critics have viewed the Maps fiasco as doing little to slow the enthusiasm for the superb new iPhone, Apple CEO Tim Cook issued a rare public apology: "With the launch of our new Maps last week, we fell short...We are extremely sorry for the frustration this has caused our customers and we are doing everything we can to make Maps better."

Mr. Cook began his missive, "At Apple, we strive to make world-class products that deliver the best experience possible to our customers." Almost without fail since 2003, Apple has been doing just that, overcoming minor shortcomings like antenna glitches and problems with its Siri voice recognition platform in the iPhone 4S, and negative publicity associated with the company’s Chinese component manufacturers.

Indeed, nothing has seemed to slow down the Apple juggernaut. Just three days after the phone's September 21 launch, the consumer electronics king announced that it had sold over five million iPhone 5 units and that stores had sold out of their initial supply. This, despite the fact that customers also had to upgrade all of their existing accessories to the new and smaller "Lightning" connector.

Though the stock price gave in to a round of profit-taking, pulling back some 10% over the last couple of weeks, it had soared to more than $700 in the excitement leading up to the iPhone 5 release. Incredibly, the shares still have returned more than 55% thus far in 2012, adding to the 25% advance in 2011 and the 53% jump in 2010. The massive run this year has come even though the stock was supposedly doomed when the company’s charismatic, iconic and very hands-on founder Steve Jobs passed away 11 months ago. And the shares quickly rebounded after the latest earnings report saw Apple miss analyst expectations by a wide margin, an event that for merely mortal high-flying stocks would have led to severe punishment and a long stay in the market’s doghouse.

On the contrary, Apple now sports the largest stock market capitalization ever recorded at more than $600 billion, and the pundits are now speculating on when the company might cross the $1 trillion mark: Click Here for the so-far ill-timed CNBC Story: A $ 1Trillion Apple?

Of course, it wasn’t always champagne and caviar for Apple shareholders. One of our managed account clients was recently lamenting the fact that his wife had received some Apple stock back in 1984, but chose not to hold on. To be sure, had she still owned the stock, she would have been grinning from ear to ear, but she would have had to have held the shares for 19 years before the rocket truly ignited—patience that we suspect few could maintain.

Long-time readers of The Prudent Speculator know that Apple has been very good to us as we are currently on our second go-round, the first ending in hefty profits after enthusiasm for the multi-colored iMac computer brought the company back from death’s door in the late 1990s. While we engaged in numerous partial sales before finally closing out that AAPL position in December 1999, our average gain topped 200%. No doubt, we were pleased with our timing after the stock had plunged by 75% a little more than three years later when the product cupboard was again relatively bare, save for a new portable music player called the iPod. A cash-rich balance sheet and an inexpensive valuation led us to make Apple an inaugural member of Buckingham Portfolio in January 2003 at a split-adjusted price of $7.13.

Lest folks think I am basking in the sun in the South of France, the timing has not been so hot this time around as I have sold portions of my Apple stake at far lower prices on numerous occasions. Alas, the current holding represents less than 6% of the initial purchase even though it is still the largest position in the portfolio!

Because I am still holding the balance of my AAPL shares for a Target Price of $800, hindsight would say that I should rue the day I made the first of many partial sales below $24 back in October 2004. However, given what we knew at those times, a rich valuation and a too-high portfolio weighting argued for the position to be trimmed.

Unfortunately, it has been a long time since Apple resided on our recommended list, meaning that it likely is either not held in newer subscriber and private client accounts, or the position is relatively small for those who do own. This creates an interesting conundrum, in that we, and most professional money managers, would look much better when measured against the major broad-based market averages if the stock tanked.

Consider that Apple as of September 30 represented 4.84% of the S&P 500 and 3.94% of the Russell 3000 index. With the stock then up 65% on the year, the contribution to return for each of those indexes was enormous. Bloomberg calculations show that the S&P had benefitted by 214 basis points and the Russell by 174 basis points over the first three quarters of 2012. And we should point out that not holding Apple in the Russell 3000 Value index had cost that benchmark 349 basis points of performance versus the Russell 3000 Growth index.

Tough as it is to be under- or zero-weight, we worry that Apple is loved by just about everyone. While I am still holding tight to my remaining AAPL shares, we would not be a new buyer of the stock today and we’d trim big positions as we know electronics consumers are very fickle. Just ask Motorola, Palm, Nokia or Research in Motion!

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John Buckingham is chief investment officer of Al Frank Asset Management, Inc. (AFAM), an Investment Advisor registered with the Securities & Exchange Commission that edits The Prudent Speculator investment newsletter and is advisor to four proprietary mutual funds.

As advisor to its own proprietary mutual funds and manager of individual client accounts, AFAM may purchase, sell or hold positions in the securities that appear in this presentation. Also, AFAM employees may hold, purchase or sell any of the stocks that appear in this presentation subject to AFAM’s Code of Ethics, Insider Trading and Personal Trading policies.

Information provided comes from independent sources believed reliable, but accuracy is not guaranteed and has not been independently verified. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is not a guarantee of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or will be equal to corresponding past performance levels. Neither the information contained in this presentation, nor any opinion expressed, shall be construed to be or constitute an offer to sell or a solicitation of an offer to buy any securities.

Investing in stocks involves risk and possible loss.

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