Can a bad Apple spoil the barrel?

Everyone wants AAPL, but how can you protect yourself?

By Jim Van Meerten Sep 23, 2010 5:38PM
I once heard Mrs. Fields say she didn't sell cookies, she sold warm memories of your childhood and the smells coming from your grandma's kitchen. 

To say Apple (AAPL) is a computer company also isn't enough.  When I go to the mall, the Apple store is packed and everyone, young and old, is standing in a line to get a hands-on experience.

All other companies just produce laptops, computers and PCs. Apple produces devices with wonderful-sounding names that you've just got to have before anyone else does. Other companies are just the present; Apple has the mystique of being the future.

Have the Apple worms crawled into my ears, and are they now controlling my mind, as with the other cult members? Is there any way I can plug my ears to the song of the Apple siren and write an honest and objective view of this stock?

Let's get the popular stuff out of the way. To say Apple has a following is an understatement. On Motley Fool, the CAPS members vote 22,413 to 2,018 that the stock will beat the market, and the All Stars are similarly entranced by a vote of 4,787 to 236. Even the Wall Street columnists Fool follows have written positive articles 46 to 0.


The Wall Street brokerages are not immune to the hype. There are 43 with published recommendations, and their analysts have 25 "strong buy" and 22 "buy" reports published.  

For you math buffs, I know that doesn't sound right, but several of the firms have the stock classified in multiple categories and have more than one analyst following Apple.  

The consensus estimates are very aggressive, with sales expected to increase 73.60% this year and 24.70% next year.  Earnings per share are expected to increase 59.10% this year, 21.90% next year and continue at a 20.19% annual rate for at least five years.

Even the old staid and very objective Value Line thinks the stock is a timely acquisition for your portfolio.

Let's step back and look at raw numbers using Barchart. I note that there are 12 of the 13 Barchart technical indicators on a buy signal for an overall 96% buy rating. 
The stock hit 19 new highs in the past 20 sessions, including five in the past five. Last month alone, the price climbed 17.75% and recently traded at $288.62 -- well above its 50-day moving average of $258.20. The 14-day Relative Strength Index is 80.79% and rising.

Those of you who follow my blogs know I try to be objective and not follow the crowd. Just because Citigroup (C) is one of the most widely traded and reported stock has not swayed me into buying that dog. Here with Apple it looks like the real deal.  Here's what its got:
  • The stock has a very wide an positive following by the general investing public.
  • Wall Street brokerage analysts have released buy recommendations based on solid fundamentals and expect high double digit increases in sales and earnings.
  • Wall Street columnists are giving the stock strong and positive press coverage.
  • Barchart confirms recent positive and consistent upward price momentum.
I can't find anything not to like about the stock, except one thing. It is in almost every one's buy list and is contained in almost all the recommended model portfolios.

Except for some very narrow-sector mutual funds, it must be owned by an overwhelming majority of every pension plan and mutual fund in the known free world. 

And that's the butterfly in my stomach. If the sales or earnings estimates are not met the mass exodus will be worse than the panic caused by fire crackers at a South American soccer match.

If I were an investor in this stock, I'd also buy some puts for insurance. This is a stock where sell stop just won't protect you.

Jim Van Meerten is an adviser to Marketocracy Capital Management who uses his model portfolios not only to manage their mutual funds but also their clients Separately Managed Accounts. You can read his blogs about those model portfolios and investing here and on Barchart Portfolio Blogs. Please leave a comment below or email JimVanMeerten@gmail.com.

Disclosure: Jim Van Meerten through Marketocracy Capital Management has an interest in the stocks mentioned in this blog.
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