A Close Look At AAPL: Enjoy The Ride
September 13th, 1999 

"The minute James Poyner (CIBC Oppenheimer), Megan Grahm Hackett (S&P) and Kimberly Alexy (Prudential) turn bullish on AAPL it will be a sure sign to sell."
Eric Yang

Enjoy the Ride

Everyone has his or her pet explanation for AAPL's new found strength. The mainstream opinion is that Apple's excellent management, unique and tightly focused product line, and status as the only consumer alternative to beige Wintel mediocrity makes Apple's future look increasingly bright.

Apple is the only computer company to have defined itself as something much larger in scope than a mere PC manufacturer while staying focus on the core issues at hand. Many aspects of Apple's business have the potential for astounding growth that has not been factored into the stock price yet. For instance, the QuickTime and Sherlock technologies have a negative value on the stock price because of the R&D expenses they generated producing lower earnings. Yet comparable technologies support the billion dollar valuations assigned to corporations like Real Network and Ask Jeeves.

Apple's brand loyalty is beyond anything that anyone else in the industry can even begin to imagine. In fact, Apple's brand loyalty is the envy of corporate America. How do they do it? Apple's legions of fans and evangelists are the stuff of marketing legend. The ringleaders of the Wintel consortium surely must lose some sleep sweating over the possibility of a Mac contagion, more fatal than any PC virus or Y2K glitch, sweeping the nation in 2000.

Thus, the result of any sober analyses is higher than expected future earnings estimates, which, naturally, drive share prices higher. The uptrend attracts increased scrutiny from curious investors who notice AAPL's undervalued strength and boost the share price even higher, attracting another wave of attention from The Street which further elevates the price as fund managers scuffle to get in on the momentum which inspires those sitting on the fence to jump in… it's a vicious cycle.

Most long time AAPL observers see the last leg of AAPL's uptrend momentum as a sign of a fundamental shift in the trading pattern of AAPL. It's a shift from an equity that fluttered in the wind, up or down, at every news item to a stolid momentum play which behaves more like the high tech market leader that Apple really is.

Momentum is an odd phenomenon. It gains steam only after all the early investors, who know the stock's true potential, have long been on board and are even getting frustrated with Wall Street's lack of acuity. Even in this era of rapid access to information, the bulk of investors can digest the facts only so quickly. Not everyone follows Apple's business as closely as we do. Investors have lives. So do analysts and their upgrades are always a day late and a dollar short. They really "follow" the stock while pretending to lead. Analysts love momentum because securities with price momentum are easy to predict. AAPL's overall direction has become a no-brainer.

Where to now?

I was just looking at the AAPL chart trying to discern some sort of tradable pattern, wondering if AAPL has found a plateau where a bit of consolidation can take place. Some voices on the net are looking for a retracement of the stock; the recent run up seems too steep, too fast for Apple. It is true that many of the technical indicators are maxed out in the positive direction for AAPL suggesting the need for a rest.

However, I'm willing to go out on a limb and predict that AAPL's PE ratio is still so remarkably low that there will be no substantial retracement below $70. A sideways trading range will suffice as rest until this quarter's earnings report comes out and blows the doors off of everyone's estimates. Then the trek towards triple digits will resume.

Disclaimer: I bought a 100 shares last week just to be back in the game. I'll be happy to have the chance to average down, but I'm not sure I'll get the chance.

The real reason some investors think AAPL is over bought is psychological. For 43 miserable weeks, from August of 1998 to June of 1999, AAPL languished in a trading range of $30 to $40, failing to break out during MacWorld and WWD. In hindsight, those 43 weeks of doldrums were a nice example of a stock building a base, but for those investors following the stock too closely--such as myself--it was a rather discouraging time.

It's natural to consider pulling the sell trigger on a stock after such a nice move, just to lock in some profits. But that could be an expensive lesson in stock trading. IBM, for instance, had $30-something run up in four weeks early this year and not only kept it all, but is up another $10 from there. Hewlett and Packard (HWP) took off at $65, and didn't take a pause till it touched $98 six weeks later, now HWP has plateaued in the $110 region. A price retracement after a strong advance, like all technical tools, is hardly etched in stone.

This is the pattern I expect Apple to take. After all, in the media Apple is no longer "the beleaguered computer manufacturer". That title goes to Compaq. Apple's name is now more likely to be associated with the future of personal computing. AAPL's sails have finally found those same strong bull market trade winds that have been powering the tech sector market leaders for years now. Enjoy the ride.

Your comments are welcomed.