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Old Jan 26, 2013, 11:50 AM   #226
MTL18
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Originally Posted by Rogifan View Post
I'm responding to the argument that AAPL sold off because of no profit growth, because of profit worries. That's why I ask about a company like Amazon that keeps going up, up and up even though they're not delivering profits. Amazon's revenue growth last year was around 40% but their earnings growth declined 45%. Their P/E ratio is 4,057. Apple's is 10. How in the world does that make any sense? Sure Amazon is growing the top line but where are the profits? Seems to me they're doing exactly what Tim Cook said Apple won't do: grow revenue for revenue's sake.

----------


How do you explain a P/E ratio of 4,057 for Amazon? Last year their profit growth declined over 45%. How long are investors going to continue to push up Amazon on the promise of future profits?[COLOR="#808080"]
AMZN is a perfect example of why growth stocks are extremely risky. Investors have a ton of faith in the e-commerce sector and sales for AMZN are growing - but PROFIT is not. This is a bubble stock, no argument there. The trouble with these over hyped darling stocks is that they need to perform at some point. Also, any sign that this e-commerce business is slowing (less sales YOY), and this is toast.

Remember that with growth stocks, fundamentals DO NOT matter while they are hyped. Once that jig is up, they crash like rockets. Look up the history of NFLX and see what happens once the bubble deflates. If you want to look at other ridiculous P/Es, check out stocks like FB, LKDN as well.

There is not a logical reason why people would invest in a stock that has such a large P/E, but that is one of the weird things about the growth sector. Fundamentals and valuations only count once their 15 minutes of fame is up. Google was no different when it started out, but it is an example of a growth stock that became a success story.

I personally don't invest in growth stocks like that, they make me too nervous. I play a patience game and go after dividend stocks that offer slow but sustainable growth over time. AAPL became one of those stocks for me in the low 500s. My mistake was not being patient enough, but live and learn.
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Old Jan 26, 2013, 12:06 PM   #227
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Originally Posted by Rogifan View Post

How do you explain a P/E ratio of 4,057 for Amazon? Last year their profit growth declined over 45%. How long are investors going to continue to push up Amazon on the promise of future profits?[COLOR="#808080"]
My explanation is that stock market is a casino. "Gowth stock" means "Ponzi scheme", "musical chairs"..

Amazon is hold by mutual funds. Fund managers know it is a lousy investment. However the investment is somebody's money, not their money, they don't care.

Another thing, fund guys don't want to see "mutually assured destruction" because it makes their fund performance look bad. That's why no mutual fund stempede out of AMZN.

Indeed less profit for Amazon and retail industry is good for consumers, less price inflation is good.
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Old Jan 26, 2013, 12:11 PM   #228
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Originally Posted by MTL18 View Post
AMZN is a perfect example of why growth stocks are extremely risky. Investors have a ton of faith in the e-commerce sector and sales for AMZN are growing - but PROFIT is not. This is a bubble stock, no argument there. The trouble with these over hyped darling stocks is that they need to perform at some point. Also, any sign that this e-commerce business is slowing (less sales YOY), and this is toast.

Remember that with growth stocks, fundamentals DO NOT matter while they are hyped. Once that jig is up, they crash like rockets. Look up the history of NFLX and see what happens once the bubble deflates. If you want to look at other ridiculous P/Es, check out stocks like FB, LKDN as well.

There is not a logical reason why people would invest in a stock that has such a large P/E, but that is one of the weird things about the growth sector. Fundamentals and valuations only count once their 15 minutes of fame is up. Google was no different when it started out, but it is an example of a growth stock that became a success story.

I personally don't invest in growth stocks like that, they make me too nervous. I play a patience game and go after dividend stocks that offer slow but sustainable growth over time. AAPL became one of those stocks for me in the low 500s. My mistake was not being patient enough, but live and learn.
+2c: Did we already forgot when AMZN was suppose to be $1000? Henry Blodget does not ring a bell anymore. AMZN got their shock decimated in 2000. It seems we have new generation ignorant of the past. Fortunate for AMZN, they manage to avoid running ahead of themselves with profit, so investors are all but hopeful the grows will come/continue for years to come. It is like being jealous of YHOO that it gain recently to $20, yet is was over $1200 in 2000. Or RIMM recent gains, yet investors lost 90% of their money already. Yes it would be great gain story for APPL if we roll it back to $20 and start over again.

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Old Jan 26, 2013, 12:28 PM   #229
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Originally Posted by lildimsum7 View Post
Isn't the Graham number unreliable with tech and growth stocks? I just read a bit on the Graham Number, and it seems to be excellent criteria for defensive investors in choosing defensive stocks. But the formula involves book value, which could give misleading numbers for tech stocks. There aren't any reliable methods for gauging the value of Apple. Apple is a good example of why Graham recommended to avoid growth stocks (unless it's at a reasonable price).
You seem to be very experienced. Do you stay away from growth stocks? How would you analyze whether a growth stock's price becomes reasonable? All I could think of is examining financial stability and its competitive position in the industry. Good entry point would be during over-pessimism (this year?). There seems to be an overreaction due to EPS growth breaking down.
I wish I could boil down my approach in a post, but anyone who promises that they can is probably selling you snake oil. But I'll try to summarize as best I can. I don't look at what the market is doing or why, because people tend to behave stupidly when in herds. That's just a general truth about life.

What I look for, and I focus on it unflinchingly, are:

1. A wide competitive moat. This is not just reflected in operating results but the national or global position of the brand within its industry. People will say "Apple's the most recognized brand" .... but one can find moats with companies that aren't necessarily popular/familiar to everybody. The company needs have a competitive advantage in its particular business, regardless of whether everybody on Earth has heard their name or not.

2. Soundness of management. This is the fuzzy math. I don't know a lot of these people as well as someone like Warren Buffett who can make a decision quicker because he already knows a lot about the people steering the ship. But their history of decision making has to be marked by long-term thinking, and not short-term profit taking. Also reasonably determined compensation that shows a track record of them being at the job because they love it, not because they got absurdly high compensation out of proportion with their performance.

3. Operating value. I'm not interested in total tangible book value because how many gold toilets an executive office has doesn't tell me how good they are at doing what they specialize in. But their working capital plus years of stable operating cash flows does. Earnings is comprised of more than operating cash flows, so I ignore it... because earnings can be buffered in bad years by other activities that have no bearing on how good of a job the company is doing at selling their core product.

The two other things that are critical to me are:

1. manufacturing oriented businesses. People often love to make things harder for themselves, and I'll never understand it. I like to keep things as simple as possible for myself. I stay focused on manufacturing because companies that make and sell widgets are easy to value. I don't know how one places a value on web advertising, or level 3 derivatives... so I stay away from banks and internet ventures and the like. But I can easily tell if a company is good at selling widgets, how many widgets they're selling, and what kind of profit they're generating from said widgets. Keeps the math very very simple... and the valuation takes less than 15 minutes.

2. Value. Buffett has said "price is what you pay, value is what you get." Like him, I will never understand the propensity for people to think that paying $5 for an asset worth $1 is more rewarding than paying 60 cents for that same asset. Either people immediately grasp this concept or they don't. Does it mean that my investments pan out all the time? Not always, but much more often than not... and it's far easier to get off a slow moving train without hurting yourself (or your pocketbook).

If you've done your homework on all the above, it's fairly easy to tell apart companies that are genuinely dogs versus those that are solid , whose operating results have not gone south, but for some other unrelated reason they are temporarily priced well below their value.

If the sensible price to pay to acquire a company from an M&A perspective is well below what the market full of yahoos is currently pricing it at, then don't make it hard on yourself by hoping that the $15 dollars you paid for an asset worth only $2 is going to go to $16 or $17. Hope is not a strategy.

One other thing I have taken into consideration is dividends. My ideal situation is one where I find a company that passes all the above tests and pays out a good dividend, so if the market is unfair to them I still get paid.

But if your degree of certainty (what Graham called the margin of safety) is lower on a security, then either avoid it or risk less money on it... Sure, if you don't bet big you can't win big. But it's not about winning big a few times. It's about winning small so often that the results compound over time.

Any number times zero is still zero. And by that I mean if chasing after unrealistic gains wipes out your principal, 26% ROI on zero principal is still zero.... Think of every dollar of principal that you lose as a dollar plus 30 years of compounded returns that you will never get back.

Now if you're uncertain enough times that you can't do better than the 30 year average of the S&P (9.3% annually compounded) then don't make it hard on yourself... An index fund doesn't have the cool factor, but would you rather be broke and talking it up at the watercooler, or boring and financially set for life?
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Old Jan 26, 2013, 12:40 PM   #230
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In your own words .... As long as the downward is elastic, as you say, it will bounce back up.Or is that fuzzy physics you are using?
What I'm saying is that overpriced securities tend to have more downward elasticity than upward. I don't care if they return to their price. I'm not betting on swings because sometimes the bungee cord breaks... You can't base a sound investment strategy on looking at the chart to guess where the next tick will fall.

I don't bet money on the idea of "hopefully it will bounce back up".... I tend to look for companies that track reasonably close to their intrinsic value, because the institutions are less likely to constantly underprice good performers. Companies whose market price grows because they're actually growing their book/intrinsic value are sensible... companies that are heavily overpriced have much more propensity to slip downward than push even higher.

Does it mean that I have lower returns in the short term? Yes, but it also means I risk losing much less principal and the compounded returns over time are far greater than someone who loses massive amounts of principal on every fifth bet he makes.
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Old Jan 26, 2013, 01:07 PM   #231
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I would like to see AAPL fall a bit more. I'm hoping to pick up some cheap stock in the midst of this insanity. Once the idiots are out of the market the price will rise again pretty fast. Here Apple is having a record quarter, but oh noes, it's not a high enough record quarter, it's only slightly higher than Apple's own guidance. So everyone is selling off. Insanity.

I really can't think of any other company whose share price would plummet after announcing record revenue. Can you? Sheer madness.
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Old Jan 26, 2013, 02:08 PM   #232
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I really can't think of any other company whose share price would plummet after announcing record revenue. Can you? Sheer madness.
Apple also warned that profits will be down next quarter.

That's hardly ever good for the stock price....
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Old Jan 26, 2013, 03:06 PM   #233
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Apple's profits are always cyclical. That's hardly news.
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Old Jan 26, 2013, 03:27 PM   #234
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Originally Posted by mrxak View Post
Apple's profits are always cyclical. That's hardly news.
It is when they meant YtoY profits. Same as their flat growth in profits this quarter compared to the year ago quarter. They're not talking about cyclical declines because of lesser revenues in Q2 vs Q1 (the holiday quarter), they're talking about lower margins thus decreased profits.

That is what caused the stock drop on earnings.

Basically, they announced that going forward, they need to lower margins to maintain revenues and thus profits won't be growing and even will decline compared to what they've had in the past. That worries investors.
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Old Jan 26, 2013, 03:50 PM   #235
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Apple also warned that profits will be down next quarter.

That's hardly ever good for the stock price....
what?
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Old Jan 26, 2013, 04:10 PM   #236
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Originally Posted by FrozenDarkness View Post
what?
Apple's guidance for 2Q13 is 8.75-9.7 billion net profit
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Old Jan 26, 2013, 04:20 PM   #237
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Apple's guidance for 2Q13 is 8.75-9.7 billion net profit
i always just care about gross revenue to be honest. i can't have my cake and eat it too. Is apple going to come out with new products and compress margins, or do nothing. All that matters is keep working that rise in revenue
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Old Jan 26, 2013, 04:27 PM   #238
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Originally Posted by Oletros View Post
Apple's guidance for 2Q13 is 8.75-9.7 billion net profit
...and 2Q12 profit was $11.6B.

That YoY loss in expected profit is to a large extent what's spooking smart investors.
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Old Jan 26, 2013, 05:23 PM   #239
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Originally Posted by FrozenDarkness View Post
i always just care about gross revenue to be honest. i can't have my cake and eat it too. Is apple going to come out with new products and compress margins, or do nothing. All that matters is keep working that rise in revenue
./sigh

They could pull $300 billion in gross revenue in a quarter if they wanted to. A degenerate example would be if they bought $100 bills and sold them for $75 each. All they'd need to do is sell 4 billion of them, which even Timmy could probably pull off, and there's your $300 billion in gross revenue (at a net loss of $100 billion which Apple could afford).

If that's all you care about in valuing a company there's much "better" investments out there for you. But you're just a perfect example of why you shouldn't invest if you don't know what you're doing.
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Old Jan 26, 2013, 05:54 PM   #240
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./sigh

They could pull $300 billion in gross revenue in a quarter if they wanted to. A degenerate example would be if they bought $100 bills and sold them for $75 each. All they'd need to do is sell 4 billion of them, which even Timmy could probably pull off, and there's your $300 billion in gross revenue (at a net loss of $100 billion which Apple could afford).

If that's all you care about in valuing a company there's much "better" investments out there for you. But you're just a perfect example of why you shouldn't invest if you don't know what you're doing.
Actually, a smart investor understands the difference between a short-term margin compression and long-term revenue decrease. EVERY new apple product, even back to when the original iPhone 4 was released, had compressed margins. that's the state of affairs. You're literally comparing a year that had iPhone 4S at the height of its margins to a quarter that will still have two new products in the market.

and a degenerate example is ... for degenerates. we're not talking about selling at a loss here, we're talking about ramping up production of a new product, which, last time i checked, is what everybody is b#$@ing about
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Old Jan 26, 2013, 07:43 PM   #241
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Many here keep saying the pro is irrelevant, post PC world, dump the core customers who need 'em etc. Now Apple is trying to compete in telephony and pads and severely limits the *pro* features of it's PCs with no upgrade philosophy for the sake of *thin*. Hell it's been over 4 years since a mac pro has been put out for professionals who needs 'em.

Without the core products of Apple computers to identify or integrate with, what do you have left? a telephone and a pad that tries to compete on the same level as everyone else's telephone and pads. BORING.

Truth is the market does not see Apple making anything innovative anymore especially when it comes to PC's and pro computers, as small as that market is, it was the main image that drove Apple to it's success which the iphone and iPad identified themselves with.

Nothing to see at apple for the creative industry, only toys for the fads that will be outgrown as this generation ages. Too bad Apple lost it's way. I am obviously not optomistic about it's future at all.
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Old Jan 26, 2013, 10:23 PM   #242
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Many here keep saying the pro is irrelevant, post PC world, dump the core customers who need 'em etc. Now Apple is trying to compete in telephony and pads and severely limits the *pro* features of it's PCs with no upgrade philosophy for the sake of *thin*. Hell it's been over 4 years since a mac pro has been put out for professionals who needs 'em.

Without the core products of Apple computers to identify or integrate with, what do you have left? a telephone and a pad that tries to compete on the same level as everyone else's telephone and pads. BORING.

Truth is the market does not see Apple making anything innovative anymore especially when it comes to PC's and pro computers, as small as that market is, it was the main image that drove Apple to it's success which the iphone and iPad identified themselves with.

Nothing to see at apple for the creative industry, only toys for the fads that will be outgrown as this generation ages. Too bad Apple lost it's way. I am obviously not optomistic about it's future at all.
Apple changed its name from "Apple Computer" to "Apple Inc" in 2007. Apple is a consumer electronic company. Seriously its core business is to make toys for adults.

It was surreal to see last year when Apple's market cap passed Exxon Mobil and became the biggest toy company in the world. Apple's future focus is all about consumerism, not creativity, not productivity.

By the way, can you run Linux or Windows to do your work? I think it's cheaper to build a latest greatest PC yourself than buy a Mac Pro.

If the software for creativce industry only runs on OS X, then you better write to the software company and ask them to jump ship to Linux or Windows. I think its good to be an operating system atheist, it doesn't matter what OS you use as long as you can get your job done.
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Old Jan 26, 2013, 10:51 PM   #243
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Originally Posted by Avatar74 View Post
I wish I could boil down my approach in a post, but anyone who promises that they can is probably selling you snake oil. But I'll try to summarize as best I can. I don't look at what the market is doing or why, because people tend to behave stupidly when in herds. That's just a general truth about life.

What I look for, and I focus on it unflinchingly, are:

1. A wide competitive moat. This is not just reflected in operating results but the national or global position of the brand within its industry. People will say "Apple's the most recognized brand" .... but one can find moats with companies that aren't necessarily popular/familiar to everybody. The company needs have a competitive advantage in its particular business, regardless of whether everybody on Earth has heard their name or not.

2. Soundness of management. This is the fuzzy math. I don't know a lot of these people as well as someone like Warren Buffett who can make a decision quicker because he already knows a lot about the people steering the ship. But their history of decision making has to be marked by long-term thinking, and not short-term profit taking. Also reasonably determined compensation that shows a track record of them being at the job because they love it, not because they got absurdly high compensation out of proportion with their performance.

3. Operating value. I'm not interested in total tangible book value because how many gold toilets an executive office has doesn't tell me how good they are at doing what they specialize in. But their working capital plus years of stable operating cash flows does. Earnings is comprised of more than operating cash flows, so I ignore it... because earnings can be buffered in bad years by other activities that have no bearing on how good of a job the company is doing at selling their core product.

The two other things that are critical to me are:

1. manufacturing oriented businesses. People often love to make things harder for themselves, and I'll never understand it. I like to keep things as simple as possible for myself. I stay focused on manufacturing because companies that make and sell widgets are easy to value. I don't know how one places a value on web advertising, or level 3 derivatives... so I stay away from banks and internet ventures and the like. But I can easily tell if a company is good at selling widgets, how many widgets they're selling, and what kind of profit they're generating from said widgets. Keeps the math very very simple... and the valuation takes less than 15 minutes.

2. Value. Buffett has said "price is what you pay, value is what you get." Like him, I will never understand the propensity for people to think that paying $5 for an asset worth $1 is more rewarding than paying 60 cents for that same asset. Either people immediately grasp this concept or they don't. Does it mean that my investments pan out all the time? Not always, but much more often than not... and it's far easier to get off a slow moving train without hurting yourself (or your pocketbook).

If you've done your homework on all the above, it's fairly easy to tell apart companies that are genuinely dogs versus those that are solid , whose operating results have not gone south, but for some other unrelated reason they are temporarily priced well below their value.

If the sensible price to pay to acquire a company from an M&A perspective is well below what the market full of yahoos is currently pricing it at, then don't make it hard on yourself by hoping that the $15 dollars you paid for an asset worth only $2 is going to go to $16 or $17. Hope is not a strategy.

One other thing I have taken into consideration is dividends. My ideal situation is one where I find a company that passes all the above tests and pays out a good dividend, so if the market is unfair to them I still get paid.

But if your degree of certainty (what Graham called the margin of safety) is lower on a security, then either avoid it or risk less money on it... Sure, if you don't bet big you can't win big. But it's not about winning big a few times. It's about winning small so often that the results compound over time.

Any number times zero is still zero. And by that I mean if chasing after unrealistic gains wipes out your principal, 26% ROI on zero principal is still zero.... Think of every dollar of principal that you lose as a dollar plus 30 years of compounded returns that you will never get back.

Now if you're uncertain enough times that you can't do better than the 30 year average of the S&P (9.3% annually compounded) then don't make it hard on yourself... An index fund doesn't have the cool factor, but would you rather be broke and talking it up at the watercooler, or boring and financially set for life?
Its a great post.
I wonder if you can share your view in light of this on Apple?
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Old Jan 27, 2013, 03:00 AM   #244
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it wasn't true then...and it certainly isn't true now.
You're most certainly wrong with that. If you go where the "puck is" you're just playing catch up. Which is what Apple is doing right now. They need to go where "the puck" is going to be and start innovating again.

Quote:
Originally Posted by DaveN View Post
So Samsung can start copying Apple again? Larger screen size is not real innovation.
And a extra row of icons is?

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Originally Posted by FrozenDarkness View Post
Don't need to read much else, this sentence in itself is absolutely false and not grounded in fact. iPhone sales increased 20% y/y, ipad sales increased 40% y/y, nobody wants apple products anymore. tim cook should just jump off a bridge right now.
Guess that's why they scaled back demand for supplies...
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Old Jan 27, 2013, 08:05 AM   #245
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If you can't afford to lose the money, you should never of invested it.
o so far I'm still playing with profits I made from apple when it was in the $200-300 range. If it goes under $400 and stays there...than I might be a little worried
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Old Jan 27, 2013, 09:25 AM   #246
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Its a great post.
I wonder if you can share your view in light of this on Apple?
I'll bet you that he will keep it in his profile. Dividend + strong fundamentals. In the short term it will be ugly as it transitions from growth stock to value security, but 12 months from now it will have gained a minimum of 10-15% + dividend.

If you believe timing is everything - you chase growth stocks (AMZN, NFLX, FB).

If you believe time in the market is everything - you chase stocks that are set for years (AAPL, even though a tech stock, should be included in that).

BTW, your earlier post was correct. The Graham number also does not work in large cap stocks as it greatly undervalues them. Since it is a root, remember that the root of 9 is 3. The root of 625 is 25. Most definitions will state that you cannot use the Graham number in large cap stocks. AAPL is one of the largest.
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Old Jan 27, 2013, 10:08 AM   #247
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wow, all in one year

i still dont get AAPL
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Old Jan 27, 2013, 10:56 AM   #248
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This is good. Now they have something to aim for.

Maybe they will start innovating again. That's what they were best at, and hopefully will be again.
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Old Jan 27, 2013, 11:00 AM   #249
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Its a great post.
I wonder if you can share your view in light of this on Apple?
DISCLAIMER: While I'm a professional business analyst, I work for a software company and I'm not in any way a money manager, broker or financial advisor. Whatever you read into my responses, your decisions and risks are entirely your own.

I think Apple passes several of the basic criteria such as moat and soundness of management, and they'll continue being a solid company with relatively stable growth but the thing that deters me the most is that looking at them now, and not in 1997-98, is sort of like being very, very late to the party when everyone and their dog is already there.

Technology also moves faster than other industries, so that may be a negative in a sense that with that greater unpredictability about the future comes greater volatility in that sector. That comment I made earlier about being able to get off the train. Most of the companies I invest in... nothing's going to happen catastrophically overnight in most cases. Volatility frequently causes people to panic. I'm not the panicky type... because I'm not the greedy type. I learned my lesson years ago after Ciena Corporation lost 50% of its value in an hour.

But because Apple is already extremely high profile and overpriced by a very large margin, I don't think its a sensible buying opportunity at this time. But I also think it's one of those odd large caps that's beset by so much speculative activity, instead of long term investment, that the idea of being "too big to fail" from a market perspective is bunk. We've already seen them lose more than 25% of their market value very quickly... Berkshire Hathaway rarely does that because a) Berkshire isn't extremely overpriced, and b) it's so undiluted and mostly stable that the majority of its investors are people who are in for the long haul and c) it's an extremely diversified business. BRK.A is currently tracking at just 1% above their intrinsic value.

Liquidity is the friend of the broker, but the enemy of the investor. I'll never understand people who think the answer is the other way around, because in all other examples you can think of, the scarcity of a resource adds to its legitimate value.

Could it be that Apple slows down later and does become a value investment after the speculators swarm to the next "hot trend"? Perhaps... but it's still overpriced now especially given that my discounted cash flow calculations have to fall sharply due to their new guidance on the next few quarters. I was still basing previous calculations on at least a couple more years of double digit growth, but that having changed means that they're worth even less than I'd calculated just 12 months ago.

To respond to MTL18: I don't believe in timing, and I don't believe that the market is right all of the time. I believe in finding value that exists right now. Apple isn't a value buy at this time so I'm not even entertaining the idea yet (if at all, because I may find a more optimal situation).

"Be greedy when others are fearful, and fearful when others are greedy." - Warren Buffett
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Last edited by Avatar74; Jan 27, 2013 at 11:28 AM.
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Old Jan 27, 2013, 12:00 PM   #250
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Quote:
Originally Posted by MTL18 View Post
I'll bet you that he will keep it in his profile. Dividend + strong fundamentals. In the short term it will be ugly as it transitions from growth stock to value security, but 12 months from now it will have gained a minimum of 10-15% + dividend.

If you believe timing is everything - you chase growth stocks (AMZN, NFLX, FB).

If you believe time in the market is everything - you chase stocks that are set for years (AAPL, even though a tech stock, should be included in that).

BTW, your earlier post was correct. The Graham number also does not work in large cap stocks as it greatly undervalues them. Since it is a root, remember that the root of 9 is 3. The root of 625 is 25. Most definitions will state that you cannot use the Graham number in large cap stocks. AAPL is one of the largest.
Is Apple a dividend stock company or a growth stock company?

If it is a dividend stock company, I would like to see more than two products in its core business. I won't count on two fashion products to bring me for years consistent dividend stream.

This is Apple's strategy to compete with low-cost devices on China market.

http://www.forbes.com/sites/erikamor...plan-in-china/

Can Apple make low price phones for Chinese students instead of offering them installment plan?
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