Who doesn’t love Apple? They have sleek and easy to use products, their late CEO was one of the coolest geeks ever, and their stock price has treated shareholders very well.
But one thing we know about stock prices that seem to only go up – the party never lasts forever.
We’re not suggesting that investors run out and liquidate their Apple investments.
We think it’s a great, well run company, and in fact we’re doing our best to run a “Microsoft free” environment here at EL CAP.
We are, however, mindful of the old retail expression: until something better comes along, you’re the best. All of Apple’s competitors have the company firmly locked into their cross hairs, and you can’t protect coolness or sleek, easy to use products with patents.
Investors shouldn’t ignore the fact that Apple missed their most recent earnings report. Back when I worked for one of the biggest investment banks on Wall Street, we once had a meeting with the Director of the firm’s research department. We asked him what he thought the biggest, most common mistake was that research analysts routinely make.
Without hesitation, he said that when a company has a bad quarter, the analysts drink the investor relations cool-aid and assume that it was just a glitch in the quarter. But he said that nine times out of 10, it’s never just one bad quarter and an earnings miss often foretells a string of disappointing quarters.
It doesn’t take a genius to jump on the momentum bandwagon and buy the current Wall Street darling. Good investors have an eerie ability to sense when it’s time to get out. It goes beyond spread sheets, price targets, and complex models – good investors get a gut feeling when it’s time to sell.
One well known Boston investor once told me that buying growth stocks was a bit like buying race cars and said that the tricky thing about race cars is that they get driven so hard that at some point the wheels fall off. He said it was his job to sell the stocks just before the wheels fell off. It’s easier said than done.
Some investors have hard and fast rules for when it’s time to sell stocks. One portfolio manager I covered, an old timer who had done business with my father and grandfather, had invested in a veterinarian hospital chain. The stock did well and was a real highflier for a while. Then it happened. Like many small, aggressive growth companies, the company announced that the wheels had fallen off and the stock got crushed.
I called the old timer and he was furious, I mean really mad. I was a bit puzzled as this certainly wasn’t the first time that he owned a stock that had blown up but I talked to him for a bit and the truth came out. He had broken one of his three cardinal rules of investing. Apparently the CEO of the company had a ponytail – yup, rule number one, don’t buy the stock if the CEO has a ponytail (I assume that this rule only applies to male CEOs).
His other cardinal rules were: be leery of companies based in Florida, and if a company relocates to Florida sell the stock, and if the CEO of the company buys a professional sports franchise, sell the stock.
We haven’t back tested these rules, and we certainly don’t personally have anything against ponytails, Florida, or professional sports. The rules do seem a bit quirky, but we can think of several well known stocks that investors could have avoided by following them. Under Dennis Kozlowski, Tyco International relocated its US headquarters to Boca Raton Florida, Adelphia Communications CEO owned the Buffalo Sabers, and isn’t Research In Motion co-CEO Jim Balsillie in the market for a NHL team?
We don’t know what the future holds for Apple’s share price, but we do think that the easy money has been made. Now begins the hard part. But if Apple’s new CEO, Tim Cook, shows up at the next product launch with a ponytail, relocates to the Sunshine State, or buys the Dodgers – watch out below.
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