renaissance

Taking Stock

An Apple a Day Keeps the Down Market Away

Apple (AAPL-$445) crushed Wall Street analysts’ earnings estimates. It did this the old fashioned way, not through juggling its accounting as many banks do, but through developing and marketing superior products. One hopes that this would subdue those chattering financial commentators who spent much of the quarter whining about competition to Apple’s iPad from competing tablets and of supposed deficiencies in its current iPhone. Apple responded by selling over 37 million iPhones and 15 million iPads during this critical holiday quarter.

I have frequently recommended Apple and it is the largest position in the portfolios I manage. Amazingly, despite the 30-point jump following its report, its stock is selling at only 10 times estimated 2012 earnings, less than the overall ratio of the stocks in the S&P 500. With new models coming this year of both the iPhone and the iPad, its momentum seems almost assured for the next year or so.

As to the long term, I am reminded of one of the many wise sayings of Warren Buffett that his favorite holding period for a stock is “forever.” Those who have tried to trade out and into Apple probably wish they had borne this in mind.

Apple certainly seems to qualify as a “forever” stock but I am reminded of other stocks that seemed to fit this category like IBM in the 1980’s and Microsoft in 2000. IBM lost two thirds of its value when personal computers invaded its traditional space. It regrouped, gained ten fold in fifteen years and its now a stable, growing member of my portfolios.

Microsoft gained remarkably in the 1980’s and 1990’s, hit a high of $58 in 1999, and is now half that. I have never recommended its stock, as it seems to have become a clumsy giant, illustrating the dangers of complacency. The Navigation Department at Annapolis taught us “Eternal vigilance is the price of good navigation.”

I am sure that Mr. Buffett would agree and his investment success relies upon vigilant monitoring of his positions. These are sometimes sold but successful positions are augmented. This is also my strategy as well as my recommendation for Apple stock. Wall Street is now posting “price targets” for Apple of as much as $650. Such belated forecasts make more for marketing attention than for sensible investing. Pending Apple’s next quarterly reports, general market movements will probably largely govern its price action.

These will continue to be volatile although not necessarily unfavorable. Europe’s monetary and economic issues will continue to have an impact with probably neither resolution or collapse taking place during 2012. These “crises’ will be echoed here, as the federal debt ceiling arguments are due to resume soon.

The margin of safety continues to be the valuations of stocks. Since the financial crisis, most companies have regrouped, resulting in continuing overall increasing earnings. With well-publicized worries spooking investors, the result has been the lowest valuations on U.S. stocks since 1990. The economic recovery has been tepid but nevertheless both stable and positive. Manufacturing has been particularly strong, accounting for the welcome improvement in employment.

Improving conditions encouraged recent recommendations of smaller companies like Fastenal (FAST-$47) and Transdigm (TDG-$102). I am adding Solarwinds (SWI-$31), which has nothing to do with solar power but much to do with information technology (IT) management.

This company, founded in 1999 in Austin, Texas, has grown to almost $200 million sales, which are increasing at a quarterly rate of 31%. It successfully employs a Web-based sales method. Profits are keeping pace and it will report early in February around a dollar a share. That would be over a 25% increase since last year, justifying its price: earnings ratio.

It will probably never become another Apple, whose business success is unique, owing much to the late Steve Jobs. His heritage is also unique, having been fired from the company he founded, then returning to build it into the world’s most valuable company. Not a bad record.

 

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/ 800.697.2622 www.crowellroberts.com

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