Monday, April 30, 2012

Is Apple Topping Out?

The price action in Apple stock presents a bit of a quandary.  It's hard to imagine better fundamental news for the company, with profits nearly doubling in the latest quarter.  But the stock's recent weakness either indicates a pause in its astonishing rise over the past several years, or it is topping out the way the "Nifty Fifty" stocks did in the early 1970's.  The group of leading growth stocks from the early 1970's were considered "one decision" stocks, with the only decision being to buy them.  Even if they were overpriced based on their current earnings, it was believed that time would bail out the investors, as the superior earnings growth of those companies would make the stocks reasonably priced.  Apple seems to be in that category today.  Yet, many of the "Nifty Fifty" stocks took twenty years to exceed the levels of the stock market peak in 1973.

Could the same thing happen to Apple stock over the next 10-20 years?  It's almost inconceivable today to  envision fundamental deterioration at the company.  The big difference this time is that Apple's stock is valued at about an average multiple of earnings, and the stock market overall is not extremely overvalued, the way it was in 1973.  So Apple has a sizable cushion of valuation that the "Nifty Fifty" lacked.  Still, to those fortunate enough to own Apple stock, I'd take some profits at the current level.

Steve Lehman

Apple:  590

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