Greedy When Fearful

Apple Stock Entering It’s Golden Years

From all my research on investing, the most important lesson I have learned, right next to the quote this blog is based on, is:

Corporations are people. They live and die just like people. Buy the babies, sell the grandparents.

Steve Jobs became a proud parent in 1976 and started a family. In 1985, his family wanted a separation. In 1996, the parents got back together and raised dozens of beautiful, successful children. But now, I think the Apple (AAPL) family is moving to Del Boca Vista.

Don’t get me wrong with my cheesy metaphor, I think Apple the company is going to live on strong for decades. The stock however, is a different story. Here’s why I think AAPL is entering it’s golden years and why I’m selling:

1)     Steve Jobs was forced once again to leave his baby. Though the general consensus (at this time) is this doesn’t matter because he laid a strong foundation.  I think it’s impossible to argue that Steve Jobs raised Superman. From the days he was lifting cars as a toddler to when he reversed time. In investing, this period of growth is the most important. Steve returned a 9,000%+ gain at his time with Apple.  This was no fluke either.  In 1986 he bought Pixar for 10 million from Lucasfilm and sold it to Disney for 7.4 billion in 2006. That’s 740 times the original investment compared to the measily 90 times he gave Apple shareholders. I’m amazed that most people underestimate his contribution to Apple and I believe history will tell otherwise. Has there been another Walt Disney? Michael Jordan?

2)     Apple is valued as the largest company in the world at 382 billion. It has increased by a Disney (60 billion) and a Sony (20 billion)  in just the past 3 months.  For Apple stock to double from here, it would have to give birth to quadruplets named Pfizer (142 billion), Wells Fargo (130 billion), Amazon (105 billion), and Nordstrom (10 billion). Pangea is going to have to drain the sea to conquer the rest of the world. The upside vs. downside risk is just not worth it.

3)     I have no edge. In 2001 I paraded my brand new iPod (that I got for Christmas) around to friends and family preaching the revolution and convinced my father and mother-in-law to buy shares when Apple was only worth 11 billion (I stupidly was completely out of the market starting my own business.  Mental Note: Never be completely out.) During the March 2009 bottom I also stupidly suggested to a friend that they not buy Apple because people wouldn’t buy expensive computers and phones in a recession. Wrong! The rich were doing just fine. However, in January of 2010 everyone thought the iPad would be a flop and I thought they were wrong. Having an edge like that is how I caught a double.

4)     There is no negativity. People scared of the market are actually buying Gold, and….Apple? “United States Of Apple” on Jim Cramer a couple of nights ago. What? Analysts have 55 buys and only ONE sell. There is only one factor that determines stock price. Supply and demand. The stock market is an auction house.  Apple stock price will only dramatically increases if a bunch of new buyers come in. If everyone already loves the stock, where do the new buyers come from? This is why contrarians make so much money. You want to buy a stock before everyone loves it.  Because of it’s massive size, I wouldn’t be surprised to see multiple contraction either despite it’s low P/E. Remember, we are in record breaking territory here.

5)     The stars are perfectly aligned. I discussed with my wife when we should sell our largest holding, Apple. When it’s the largest company in the world or when Steve Jobs leaves? We decided when Steve Jobs leaves. He just left. Yet, Apple is still the largest company in the world. It just blew through its 52 week high because people are excited about iPhone 5. Amazing! The stars are perfectly aligned to sell.

Now, I could be wrong and I might be making a mistake. Apple could be broken up into small pieces (which can be great for investors as smaller companies are babies which can grow) or start paying a massive dividend with that 80 billion cash hoard they have.  If you look at the valuations below, Apple is “cheap” by traditional metrics like PEG or Cash Flow, especially if you back out cash.  I also want to own a part of the first trillion dollar company in history if Apple makes even more history.  So, one of my new rules is to never sell an entire position. I’m only selling 75% of my Apple position, and letting the other 25% float around forever like coins in the bottom of Grandma’s change jar never to be touched. The beauty of Jim Cramer’s “Playing with the houses money” strategy that makes it impossible to lose.  Even if the remaining 25% of my Apple position goes bankrupt, I’ll still have a permanent 70% return on this investment.

I can’t believe it, but a decade after the best call I have ever made in 2001, Apple is now a SELL.

Monty