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The house rules are simple in this weekly column: I bash a stock that I think is heading lower, then offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Apple (Nasdaq: AAPL  ) .

An Apple a day helps keep the bears away
This one's going to hurt. I'm a huge fan of nearly all things Apple, and I routinely turn to the class of Cupertino in this column as one of the three replacements. However, something has troubled me at Apple over the past few trading days -- and I just can't ignore it.

We all knew that Steve Jobs' health was a delicate issue, but his abrupt resignation last week still shocked me. Apple shares took a swift hit in after-hours trading on the news, but with most analysts arguing that this was a buying opportunity, Apple's stock shed less than 1% the following trading day. A week later, it's a brisk jog away from an all-time high.

The market overreacts sometimes. Stocks get pummeled on slight misses or guidance tweaks. You routinely see a company make a questionable acquisition, only to shed more in market cap than it paid for the actual deal. But this time, Wall Street's clearly underreacting.

Do you think that shares of Oracle (Nasdaq: ORCL  ) or Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) would trade 2% higher a week after Larry Ellison or Warren Buffett headed for the door? Of course not. Ellison is the master architect of Oracle's acquisitive strategy in enterprise software. And I don't want Buffetteers arguing that Charlie Munger is as good as Buffett, because we just don't know how well one would perform without the other. Besides, Munger's no spring chicken, either.

As Apple's charismatic co-founder, Jobs is irreplaceable. I don't buy the argument that Jobs' departure was priced in. Jobs got us to buy tablets -- not because they were practical, but because they were magical. Who will sell us on Apple televisions in 2012, cars in 2017, and teleportation pads in 2022? Jobs was the salt-and-pepper scruffy face of Apple. We'll continue to buy iPhones and MacBooks, but will the local Apple store still be as cool?

Shares of Apple look cheap relative to its recent growth. It's hard to talk investors away from the allure of Apple at 14 times this fiscal year's projected profitability, and a mere 12 times next year's target. However, Apple will face challenges without Jobs. It's more vulnerable now than it was a resignation ago.

Can anyone now guarantee that Apple will be more relevant five years from now than it is today? I felt that way before. Now that a company reliant on selling premium hardware is missing its salesman, I'm not so sure.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

Google (Nasdaq: GOOG  )
The world's leading search engine remains a handful for Apple on the iPhone front. Android devices keep padding their market-share lead in this country. It's true that Apple doesn't see this as an arms race. It's commanding formidable profits, while Google gives its platform away as a lifeboat to non-Apple handset manufacturers. However, Google's ability to finally make an open-source solution marketable will eventually eat into Apple's smartphones, tablets, and even computers. As it stands, Google also trades at a compelling discount to its growth rate, fetching less than 13 times next year's bottom-line estimates. (Nasdaq: AMZN  )
For months, I've been saying that the only thing that Apple needs to fear on the iPad front -- for now -- is Amazon. The leading online retailer is now just weeks away, reportedly, from introducing the first of two tablets. Why can Amazon succeed in areas where other "iPad killers" have failed? Well, Amazon has an ecosystem of digital products to push, so it can afford to sell its tablets at cost -- or even at a loss. We've seen Amazon's aggressive pricing strategy with the Kindle, slashing the gizmo's price by roughly two-thirds since it hit the market just four years ago. The e-tail giant will likely make these tablets stick.

Amazon also offers video streaming of select titles -- at no additional cost -- to its millions of Prime loyalty shopping club members. This will be a major differentiator. I won't insult you by bringing up Amazon's valuation relative to Apple and Google. It's not cheap, but it's also never been cheap.

ZAGG (Nasdaq: ZAGG  )
There is pride in being a bandwagon hopper. ZAGG's popularity exists largely thanks to its ability to sell screen protectors and other third-party accessories for Apple products. Revenue soared 158% in its latest quarter, blowing past Wall Street's profit targets along the way. I like ZAGG here because it's not just a pure play on Apple. ZAGG also makes protective and enhancing accessories for other touch-based smartphones and tablets. As the market widens for opportunities outside of Apple, ZAGG should be able to outpace Apple's growth.

I hope I'm wrong about Apple, but I don't think life will be so easy post-Jobs.

The Motley Fool owns shares of Oracle, Google, Berkshire Hathaway, and Apple. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Google,, and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. Hedoes not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (10) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 01, 2011, at 5:34 PM, BlakeWellington wrote:

    At only 15 times future earnings, I think AAPL is still a bargain and I wouldn't mind owning more of it. It is still one of the most successful companies in the world with a pipeline of products to last a few years into the future. It has a huge moat (iTunes, app Store, installed base of LOYAL iMinions). It is a Rule Maker and a Top Dog in its industry. I can't believe that, with a market capitalization north of 350B, one man's leaving will greatly affect the stock. Jobs has been on MLA since early in the year and the market has already priced that into the stock.

    Rue the day, Rick! Rue the day AAPL hits $1000.

  • Report this Comment On September 01, 2011, at 11:20 PM, RetroAlum wrote:

    Respectfully, not buying the argument.

    The comparison to Buffett is a false analogy. Very few people who know BRK don't know about him; MANY apple users don't know Jobs, they just like his gadgets. It's not the "cult of personality"/ figurehead old days of apple. The minor stock blip illustrates this.

    More to the point, Jobs [and Buffett, for that matter] have laid out simple strategies that work. For apple: It doesn't have to be totally original, but it HAS to be a cleaner, more intuitive experience. People trust apple to keep doing that, and there's little reason to believe it can't. Jobs or no.

    True, Google could be a formidable opponent. It will be interesting to see. They've got their fingers in so many pies it could get messy.

    As for Amazon: Propping them up on speculation of an iPad killer? Good luck once the next "gotta' have it" comes along.

  • Report this Comment On September 02, 2011, at 3:08 AM, kariku wrote:

    GOOG in exchange for AAPL ? Are you serious ?

  • Report this Comment On September 02, 2011, at 9:54 AM, lucasmonger wrote:

    Amazon, Apple, and Google stock prices are all too high now. Oh for the days when Apple was at $13 per share ($6.50 if you take into account the split) and Amazon at $10 around the dot-bomb era.

    ....wishing for a time machine so I could go all in on Amazon and Apple in 2002.

  • Report this Comment On September 02, 2011, at 11:26 AM, dustyfacts wrote:

    The effect Job's departure will have on Apple is temporary.

    ZAGG may have posted stellar earnings, but are they tarnished? Many rumors of sketchy accounting practices. I'll wait and watch this one unfold.

  • Report this Comment On September 02, 2011, at 12:02 PM, constructive wrote:

    "This will be a major differentiator. I won't insult you by bringing up Amazon's valuation relative to Apple and Google."

    Why would your readers be insulted by discussing valuation? If anything most people would welcome it, you and Rule Breakers spend far too little time discussing value.

  • Report this Comment On September 03, 2011, at 7:47 AM, David369 wrote:

    I pictured Jobs as the guy who saw the new toys and basically beat his employees into making them work by his announcement deadline (so what if they had minor bugs). They are losing their pirate ship captain. I don't know if that will matter all that much.

  • Report this Comment On September 03, 2011, at 8:48 PM, Blueman1000 wrote:

    Steve Jobs' abrupt resignation? Who the H_LL do you think you are? Was he supposed to tell you in advance or any of us. We've known of this man's health give me a break! If you want to get more comments on your postings just ask/ beg for them you don't have to resort to this tabloid bashing none sense.

    As for your three picks, you can throw Amazon out right now, sooner or later one state is going to force AMZN to start collecting sales taxes like Best Buy does and most others and then this stock will fall faster than gravity. That's AMZN's savings grace and it won't be able to avoid it forever. How many states are currently suing them? I believe it's atleast 14 and California just turned down AMZN's sneaky offer to create a distribution center with 1000 dead end jobs if it would back off (for now).

  • Report this Comment On September 06, 2011, at 5:37 AM, beastofbodmin wrote:

    Not Foolish I know, but there is a lot of short interest in ZAGG. Down from 93% on 15th July.


  • Report this Comment On September 06, 2011, at 8:21 PM, ushanarayanan wrote:

    Most times innovative ideas come from middle managers and even engineers as opposed to the senior guys in a company.

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