The Obsession With Apple
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
First, let me say that I realize the irony in writing about "the obsession with Apple" indicates that I am somewhat obsessed with the stock. However, I write this piece to illustrate a point. That one's chances for investing success are greatly enhanced if one can focus on areas that are far off radar.
I must admit, Apple (NASDAQ: AAPL) is a great company with a great product lineup. However, a great company and great investment do not always coincide. The company has had a sensational run during the past decade as both an investment and product innovator, but all good things must ultimately come to an end (or at least slow down). However, this piece is intended to highlight the psychology of investing, not necessarily to discuss its merits as an investment.
Nearly a decade ago, it would have been impossible to find anyone in the financial press discussing the company. It took years of incredible product introduction and equally impressive stock performance for the media to take notice. So when media outlets began to obsess about the stock over the past year, I began to get weary. Soon the ticker was appearing on every broadcast showing the minute by minute trading activity. Earnings releases were treated like a major news announcement. Many sell side analyst began moving price targets to match the stock's astronomical rise. I think the final straw came when friends and colleagues started to persist with questions regarding Apple's future.
Although I couldn't predict when, it didn't shock me to see the price of AAPL shares correct. Will it drop further? I honestly don't know. The company's latest quarterly results weren't all that disappointing, but the stock sold off regardless. Generating quarterly run rates of almost $40 billion is no small feat. This is the problem with built up expectations and obsession. Actual results can't possibly match those lofty expectations. Interestingly, valuations aren't all that obscene - trading at only 7x EBITDA.
The idea of obsession can work to the downside as well. Let's examine the flip side of this equation with companies such as Research in Motion (now called BlackBerry) and Nokia. There was a time not long ago that Nokia held a commanding share of the cell phone handset market and RIMM (oops, sorry - BlackBerry) dominated the nascent smart phone market. But, consumer and investor sentiment changes rapidly in the world of consumer electronics. By the way, this highlights an important lesson from Warren Buffett - it's usually best to avoid industries where things change rapidly - but I digress. The media's obsession with both RIMM and NOK led to potentially oversold conditions on both names, presenting opportunities on the long side. Frankly, I'm not sure if RIMM can successfully retain the corporate user or if Nokia can gain traction in the smart phone category, but there is a compelling argument to be made for higher stock prices - at least for the short term. This hyper focus happens across all industries - does the name Herbalife ring any bells?
A simple rule of thumb is if you're interested in an investment (either long or short) wait until it disappears form the headlines. This leads us back to our original topic - the obsession with Apple. So when might I become interested in owning shares? When people stop obsessing about it.
William J. DeRosa, Jr, CFA is a Registered Investment Advisor. The author is neither long or short securities mentioned in this article. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!