Some weeks ago I wrote “Apple is so 2010.” The Apple Fanboys, as they are known, were all over the article complaining loudly to the editors at Forbes.com. I couldn’t possibly know anything and therefore my contention that the stock had peaked was bogus. I didn't own it but I surely had some ax to grind.
After decades on Wall Street I have witnessed this same type of feeding frenzy many times. Think Krispy Krème donuts. Think Crocs rubber shoes. Think about stocks in the restaurant and apparel sector that catch fire and the imagination of investors. They rise and then they flame out because not much is really worth 50 or 100 times earnings if you seek to buy value in your stock selections. These were both simple products that were fads embraced by our culture from top to bottom and the investing public latched on as well. I remember photos of then President George W. Bush in his Crocs. Those stocks ran up, and then down just about as fast.
Apple is not in that league at all. Apple is a serious technology innovator with a series of outstanding products that have changed the computing landscape forever. Think about Dell trying to go private now if you don't believe me. When Steve Jobs was at the helm, he drove the company’s engineers and designers to bring his visions to life. It’s hard for any company to maintain that momentum when it has grown to be the largest company in the U.S. It simply becomes the law of large numbers.
When it comes to the mobile device market (we used to call them phones but not anymore as we move closer and closer to the Dick Tracy wristwatch) think of how fickle customers are: first Motorola, then RIMM’s Blackberry, were the trendy devices before the iPhone. What really drove Apple was the uniqueness of its products which it could then sell at huge margins, far beyond what more mortal companies can charge for their humble offerings.
I wrote months ago that what was great for Apple in selling iPhones to the Telcos was killing the phone companies’ profit margins because the subsidies they had to offer to the public to fit them up with an iPhone were so substantial. The more new customers they signed up, the worse the hit to short term earnings. The hope was that if you used more bandwidth using the device, they would make it up over the life of the contract. However, that meant the phone companies are now incented to sell competing products from other manufacturers whose devices cost less to buy because the consumer subsidies are much smaller.
Then there was poor Sprint that can’t seem to do much right. It was the last in line to agree to pay Apple huge prices for its phones just as they were peaking in attractiveness to consumers. Sprint was desperate to do something to stop the outflow of customers who just wanted iPhones.
The variety of Android phones on the market vastly exceed Apple's in popularity and have a much larger market share, too. As 2012 unfolded, it became clear that Apple’s margins were going to begin to abate, that the law of large numbers was going to limit the potential for huge percentage gains to continue. Yes, it sold vast numbers of devices but the bloom was off the rose. There was the map fiasco. And the big new thing was just a smaller iPad.
When a stock becomes a momentum play, it’s not much different than musical chairs. The stock races higher and higher as more and more people say publicly that Apple is just the most amazing company that can do no wrong. A price target of $1000 suddenly was not out of the question. You’d better barrel in if you don’t already own it.
When the music stops, it isn’t much different. You may not know in real time when the stock will start to descend from its lofty heights but neither does anyone else. The downward slope becomes the same self-fulfilling prophecy that the upslope represented, just in the opposite direction. Many funds end their fiscal year at the end of October. A friend of mine thought of going short Apple in September. I suggested he mind the timing re: that end of hedge fund year. If folks wanted to bail, it seemed more likely they would start to do so as their investment years ended. Until then, they were happy to defend the stock from any assault on its price and they did. More recently, investors were happy to move on, pushing the snowball down the hill faster. Now the stock has just about round tripped and is actually just about flat over the latest 12 months. Its 12 month price range has been from $435 to $705 and back again.
Apple is still selling for only 10 times earnings, a bargain for a company with its record of success. It also pays a dividend now which at 2.4% exceeds the return you can earn on a 10 year Treasury Bond. The same questions remain: what can Apple do as an encore? Can Tim Cook really run the company as a growth company? Does anyone there have the vision thing that was Steve Jobs particular gift?
A good summary of momentum investing is “easy come, easy go.” Powerful moves up inevitably lead to shocking moves to the downside. If you want to ride one of these stocks embraced by the momentum crowd, just be aware of what awaits you on the other side of the mountain top. The decline usually is twice as swift as the rise.
Joan E. Lappin CFA Gramercy Capital Mgt. Corp. Neither Mrs. Lappin nor Gramercy Capital and its clients own shares in any stock mentioned in this blog. They do own shares in Nokia, mentioned in an article displayed in this blog. Nokia bottomed at a 2012 low of $1.63 and is now selling for prices above $4.20.
For information about Gramercy Capital contact us at info@gramercycapital.com. You can follow Joan at twitter: @joanlappin.
