Date: April 24, 2012

The Bubble in Apple

It’s amazing that every time I take the unpopular view on the market, a sector, a general security or a stock, people come out of the woodwork to so easily dismiss the majority view as implausible or crazy, which is fine.  Everyone is entitled to their own opinion and I have always believed that respectful and constructive disagreement is healthy communication.  The “problem” is that it usually and eventually leads to personal attacks or worse from anonymous cowards sitting behind their keyboard.

Here is the final segment I did with my friends at Yahoo! Finance for their show, Breakout.  Some of the emails I have received so far accuse me of treason,blasphemy and heresy.  Hmmm… those are eerily similar to those I received in early 2000 regarding the Dotcoms.  For the record, I don’t believe Apple is equivalent to Dotcom bomb, but the sentiment surrounding it surely is.  To me, Apple most closely resembles Google in 2007.

There’s an old saying amongst Bible Belt evangelists that goes, “You gotta get ’em in the tent before you start preaching to ’em.” Along those lines, Paul Schatz, president of Heritage Capital, offered some inspiring but cautionary words for the Apple (AAPL) faithful.

The past week has seen the largest stock in the world face its toughest 5-day slump in 6 months. The way forward for Apple is still fraught with nerves, as some worry that all those gains could fast become profits, should investors finally decide to realize them and exit this crowded trade.

“The fundamentals of Apple couldn’t be better,” Schatz says in the attached video. “Apple could go to $700, $800, $1,000 first. I’m not that ridiculous in my notion to think that Apple is going to top right here.”

Yet, in the next breath, Schatz paints a treacherous picture of what a post-top exodus might look like, saying, “Whenever that bull market peaks, I think Apple is headed, minimally, 30% down, probably 50% to 60% down.”

It’s all part of what happens when opinion changes on the ”lone stock standing.” Until now, virtually every fund manager in the world, depending on their style, needed to have anywhere from 5% to 25% of their assets in this one stock just to tread water. Because of the breadth of ownership (71% by institutions), plus Apple’s red-hot performance and outlook, it has essentially been on the do-not-sell list whenever we hit a bit of turbulence.

But Schatz says that is always how it has been with widely-held mega-caps like IBM, GE, or Exxon.

“This is the dot-com bubble all over again. I’m sorry, I am not saying it will never recover, but when you have the whole nation in one story stock, it never never never ends well,” he says, pointing to a dearth of evidence for similar soft landings.

In the meantime, his advice is to own it but keep raising your stop-loss orders, or even start lightening up a bit, because when “go-time” inevitably arrives, it’s not going to be pretty.


Paul Schatz, President, Heritage Capital