How to Catch a Falling Apple

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LONDON -- "Never catch a falling knife" is an oft-quoted investing saying: a share that falls can continue falling further and faster than you ever imagined, so watch your fingers! Okay, that's understood, but should you ever catch a falling Apple  (NASDAQ: AAPL  ) ?

At the beginning of the year, just before the announcement of its latest results, I tipped Apple as one of my best buys of the year. I felt it was a good contrarian buy -- once the go-go stock of the moment, the mounting negative publicity around the company had caused a major sell-off.

A little perspective
A few days later, the company's latest results came out, causing the share price to slump 10%. The share price fall was so rapid it left me rather stunned and wondering: was I wrong about Apple all along?

Well, let's put this into some kind of perspective. Although Apple's results were mildly disappointing, it was still a good quarter for the tech giant. The company is selling more iPhones and iPads than ever before. And I suspect sales, particularly of tablet computers, will go from strength to strength over the next few years.

The investment case still rings true
Already, one in six computers sold today is an iPad. Yet big business is yet to really adopt the iPad. Once companies start buying tablet computers instead of laptops and desktops, you can expect Apple profits to be given another boost. And, of course, there is the emerging market story. And Apple TV... 

The crux of my investment case: that we are still at the early stages of a long-term trend away from PCs and laptops to smartphones and tablets, still rings true.

But one thing I did underestimate was the surge in sales of Apple's arch rival: Samsung. While Apple has gone for margin and quality, Samsung has gone for volume. The result is that Samsung sells more smartphones than any other company on the planet, but -- crucially -- Apple still makes more profit.

Samsung's success is putting pressure on Apple's margins, and it is also trying to out-innovate the boys from Cupertino. How can Apple possibly compete? In my view, there is no easy answer. It just has to keep trying, and keep innovating.

But Apple is more than just a technology company. Out of a unique blend of creativity, design, and simplicity, Steve Jobs has fashioned a global brand that is, still, second to none. For this reason, in my mind, Apple remains a buy.

Apple has been an astonishing growth story over the past decade. It is a prime example of how a rapidly growing company can be rocket fuel for your portfolio.

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  • Report this Comment On February 11, 2013, at 4:28 PM, dwilh51183 wrote:

    AAPL is rallying because it is way too cheap at 8x earnings, a pe of 10, rising cash pile of 137 billion, dividends that are getting raised, and sales last quarter of 55 BILLION . 55 BILLION...Sounds like AAPL PRODUCTS STILL HAVE DEMAND TO ME !

  • Report this Comment On February 11, 2013, at 4:44 PM, marv08 wrote:

    Right. We also need a little perspective:

    - Apple has, on average, only released truly disruptive products every 6-7 years, the iPad is not even 3 years old.

    - Apple's stock has (for a few years) gained with some pretty stark waves in between, these "waves" look much more dramatic at a higher valuation.

    - The run to above $700 was, clearly, ahead of itself.

    - Apple's stock has not been that cheap for ages.

    - The Q4 (CY) result was hampered by supply issues (iPad Mini and iMac throughout the quarter, iPhone for more than 2/3 of the quarter) and a one week shorter quarter YoY.

    - Hedge fonds were aggressively targeting the stock and there was a, previously unseen, orchestrated gloom and doom attack by several analysts, media houses and blogs. All of them lacking substance and credibility.

    Despite that scenario, fundamentals all improved. Market share improved. Profits improved. Market share in developing countries improved. The "disastrous" iPhone 5 is the best-selling phone ever. The iPad is the fastest growing device in history. User satisfaction (and intentions to buy again) sit steady at 90%, while the nearest competitor (Android) is between 50-60%, BB and Nokia are even below that. Only negative: a margin decrease. A decrease coming from a dream level, in a quarter were all products accounting for approx. 70% of the total revenue have been revamped.

    If this is a negative, then what to say about every other company on earth? A stock falling doesn't mean a company falling.

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