We all hope that the stocks we pick will grow in value. But when they grow faster and farther than we ever dreamed, they can rapidly become a bit too confusing.
Consider my investment in Apple (Nasdaq: AAPL) late in 2008. The stock has roughly tripled in less than a year and a half! It's hard not to have dollar signs in your eyes in such a situation. Invest a mere $3,000, and presto – you're looking at $9,000 all of a sudden, with $6,000 in profits.
And now, the hard decision
Shake those dollar signs off, pronto. A surging stock may have gotten ahead of itself; from this point on, it might be more likely to fall than to keep rising. Now, you've got two obvious choices:
- Do nothing, and hope for more rapid growth. Many of us get excited by our quick profits. Greedy for more, we hang on, hoping to make a killing.
- Sell, content with your tidy profit.
There's a third, better option, though: Take a closer look at the stock. A stock that has run up 200% stands a good chance of having gotten ahead of itself, and might be a smart sell. But if your stock seems just a little overvalued, yet still very promising, you might want to hang on and avoid a potential tax hit.
Is Apple overvalued?
Judging value is tough, but comparing your company to its competitors can help. In this case, let's weigh fellow tech heavyweights Hewlett-Packard (NYSE: HPQ) and Microsoft (Nasdaq: MSFT) against Apple.
When I look at simple metrics, Apple doesn't seem wildly overvalued. Its P/E ratio, recently near 22, is a little steep. But at 16.5%, its expected future growth rate is more attractive than its competitors'. Its forward-looking P/E near 17 is more reasonable. Investors typically pay up for fast growers.
Microsoft and Hewlett-Packard seem more attractively valued right now, with P/Es recently around 14, but their expected growth rates aren't as exciting, at 9% and 14%, respectively. Hewlett-Packard has posted stronger growth in its business systems, though, which may justify investors' interest.
With its hefty profit margins and capital-light business, Microsoft should arguably be the most compelling of the three. But Microsoft seems to be searching for direction lately, as it struggles to compete in portable media players, smart phones, search engines, and other hot items in tech. Apple, by comparison, seems to know exactly where it wants to go.
The bottom line for me is that I don't feel any need to rush and sell my Apple shares, though I should keep my eyes open for stocks that seem much more attractive. After all, your money should always be in your best ideas.
