Another Path to Profit: Riding Apple's Coattails

Investors always like a winning story. Impressive long-term returns from companies such as Microsoft, Hansen Natural, and Wal-Mart captivate our attention and serve as a guide for finding the next great stock. Investors in iPod magnate Apple (Nasdaq: AAPL  ) have taken part in a great story as well -- stock in Steve Jobs' iconic company has risen 1,329% in the past five years.

And while there is much debate today as to whether pricey shares in Apple will continue to beat the market going forward, there are many alternatives to profiting from a company that has already proven itself a winner. Riding the coattails of a trend-making company can sometimes be even more profitable for investors, but it helps to know where to look first.

Finding the tail on this coat
No doubt about it, Apple has revolutionized the world of personal media players. The company is capitalizing on the huge growth in interest in its iPod line and hopes to keep the good times rolling with its first mobile phone foray, the iPhone. So how would an investor spot compelling investment opportunities that would share in Apple's success? If we can nail down some companies profiting from the burgeoning ecosystem Apple is driving, maybe we'll find a hidden gem worthy of investment.

But I think conventional wisdom about coattail companies is sometimes too limited -- typically, investors think coattail companies are simply direct suppliers to a giant like Apple. This was the case with the attention given to PortalPlayer, a supplier of iPod chips that was acquired by NVIDIA (Nasdaq: NVDA  ) last year. The same case could be made today for Broadcom (Nasdaq: BRCM  ) , which makes the touch-screen controller chip for the iPhone. And then there's the recent buzz around Synchronoss (Nasdaq: SNCR  ) , which supplies services to AT&T (NYSE: T  ) in support of the iPhone launch.

But I think there are even more opportunities that may be hidden from investors, beyond possibly short-lived supply contracts for killer products or services. There are several other ways small companies can derive sustained growth from a booming sector. For instance, a company may make accessories for a widely distributed product, address an overlooked niche in a related market, or even offer a competing product or service that has a price advantage. This is where Motley Fool CAPS can really help; the massive stock database has lots of tools for finding and researching stocks and stock pickers.

Tagging along with CAPS
With CAPS, investors can look through Apple's tag list for other companies sporting similar attributes. For instance, Apple has tags such as "Software," "Music," and "Products for Nerds." Additionally, links to Motley Fool analysis, news releases, and discussion boards are also at your fingertips.

Another powerful tool in the community is the comments other investors register on companies. Oftentimes, the commentary contains peer analysis and recommendations for other related companies. Sometimes these resources turn up companies that have little or even no direct connection to Apple, but contain similar qualities or attributes that could make them attractive investments.

Tail wagging
Of course, plenty of coattail investments have proven to be shallow companies or copycats that ultimately flopped for investors. For this reason, CAPS is best used as a research tool and means to find investments, and not a device to pick stocks for you. Investors should always perform their own due diligence on companies rather than take a blanket recommendation. But you can't beat the information and resources for the price -- which, by the way, is free.

Is there another stock you know about that has Apple's wind in its sail? Give your own opinion in Motley Fool CAPS.

NVIDIA is a Motley Fool Stock Advisor pick. A free 30-day trial to Stock Advisor is yours -- just follow this link to get started.

Fool contributor Dave Mock has never worn a coat with tails, and prefers the waiter style. He owns no shares of companies mentioned here. Wal-Mart and Microsoft are Inside Value choices. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy is imitated but never duplicated.


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