Remember when Apple-ites were crazy cultists whose computers would end up in the museum next to the Commodore 64s? I may be typing on a MacBook Air right now, but in the early 2000s, Apple (Nasdaq: AAPL) still hadn't fulfilled the expectations created by Steve Jobs' 1997 return. Apples were decaying fruit.

Yet the signs of a turnaround were there. Here's what I saw, and here's how I missed the Red Delicious.

Hard times
 BusinessWeek recently reviewed the company's history before Jobs' 1997 return:

It's difficult to remember how far Apple had fallen. Just a few months away from bankruptcy, the company had a dwindling 4 percent share of the PC market and annual losses exceeding $1 billion. Three CEOs had come and gone in a decade; board members had tried to sell the company but found no takers. Two months after Apple's deal with Microsoft, Michael Dell told a tech industry symposium that if he ran Apple, he'd "shut it down and give the money back to shareholders."

The "deal" with Microsoft (Nasdaq: MSFT) was a $150 million investment and plans for Microsoft Office for Mac within five years. Wow, knock me over with a feather!

Gates and Dell's (Nasdaq: DELL) Dell were the gods, and even into 2000 Jobs has not engineered the hoped-for turnaround. The players had such solid positions that when my friend's young son called his parents in to see that he had spelled "computer" correctly out of those ubiquitous magnetic letters on the fridge, it was actually "D-E-L-L." Microsoft was the software and Dell the box. It was that simple. Apple had grown into a mere afterthought.

IP, whee!
I was far more interested in companies with "real" tech futures -- companies like ARM Holdings (Nasdaq: ARMH), Qualcomm (Nasdaq: QCOM), and Rambus (Nasdaq: RMBS). "IP" companies, licensing their path-breaking technology as intellectual property for use in other products.

I thought, Why bet on software or boxes when you could have the high-margin licensing income? Uh, maybe because companies like Nokia (NYSE: NOK) and the semiconductor makers fought with nuclear litigation to avoid paying the license fees. ARM wasn't yet everywhere as it is today, Qualcomm's valuation priced in some fee litigation success, and the semi makers killed Rambus' path-breaking RDRAM. Priced to dream, really.

Yes, I owned them each once, and no, I didn't make any real money.

Hidden in plain sight
Instead of projecting potential license fees from customers who didn't want to pay them, I should have seen what was in front of my eyes. By the time the second iPod with the touch-sensitive wheel came out in October 2002, it wasn't just an early-adopter geek toy. No longer did just a couple of Motley Fool techies have one, but people throughout the company and friends outside. Even I could tell the margins there and with the iTunes music store were great and sales ramping.

But apparently "telling" didn't translate into my rubbing two brain cells together. And there's more.

The meat of the metrics
I didn't know the market was at a bottom from fall 2002 to March 2003, but I'd had enough valuation schooling to see cheap and good opportunities. For part of my portfolio, I was buying cash-rich, free-cash-flow neutral to positive companies for less than two times cash -- the better the business, closer to two; the worse, one and under. It worked out well in the coming bull market, but the key was the process: The protection was there if the market had done nothing.

Apple turned free-cash-flow positive in the quarter ending Dec. 2002, and with two exceptions, never looked back. No one could foresee the future, but the ramping product and music sales meant something.

Plus, shares were at two times net cash, in the low-to-mid teens with quarter -- with $6.15 in cash per diluted share -- around 50% of the market cap. It fit my profile, but I didn't put it on.

Allocation and risk management
It would have made sense to allocate maybe 3% to the opportunity -- not enough to permanently damage the portfolio if Apple turned out to be a crabapple and dropped toward cash it would be burning. But it would move the needle, if -- as happened -- Apple ripened into the tasty Honeycrisp of a cash-minting maker of visionary life-changing products.

Sure, I would have sold at some point on valuation grounds. That's what I do. But in late 2002 and early 2003, the odds were very good indeed for fine return against reasonable risk. My process has evolved, but I stick to it. Then and now, you can't win if you don't trust it and play.

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