AAPL Momentum and the Mac OS

Dave Van Knapp sent in a follow-up to his thoughts on Apple posted last Monday:

As you read the many interesting comments people have made about AAPL, you realize they are all projections and conjecture about what might happen, some of them contradictory to others. The only thing we know for sure is that the future is impossible to predict.

So pick your favorite scenario. Then the question, as it relates to Apple’s stock, becomes a chain of questions:

  • What effect will that scenario have on the company’s finances?
  • How will the investing public view and interpret the effect on Apple’s finances?
  • How will the investing public value that effect?
  • How does that valuation compare to how Apple is valued right now?
  • Will the public re-value Apple’s stock?

Who knows? Nobody.

Your original question was, “Is it time to short Apple’s stock?”

My simple answer to that question is, “What’s it doing? It’s going up and has been going up for about a year. Many people believe it is overvalued already, and has been for some time, but the fact is that it’s been going up anyway.”

So, to return to your original question, I still think the answer is to ride the wave or stay out of the water. If you’re riding the wave, protect yourself with a stop-loss order…the wave may crash unexpectedly. If someone’s thought is to short Apple because “it has to go down at some point,” they are probably right, but wait until it actually starts to go down, or at least stops going up, before you do so.

Clearly, Apple’s stock is trading on way more than fundamentals. It’s trading on excitement, the iPhone, speculation about Macs vs. PCs, speculation about spin-off products and line extensions, adulation of Steve Jobs, and so on. It’s in a little market bubble all its own (it went up a couple bucks two days ago when the market as a whole tanked).
When a stock gets this way, I believe the best thing to do is treat it as a trend-following opportunity. The rest of it will sort itself out in time, but there’s little point in risking money soley on a belief that you’ve picked out the right scenario and answered the entire chain of questions correctly.

This is a good run-down not just of what’s driving shares of Apple and why it’s wise to hold off shorting until they actually shows signs of weakness, but of the nature of momentum in stocks generally. The old saying that “nothing’s as bullish as a rising price” comes to mind. Capital appreciation brought on by excitement and hope is just as enriching as the type brought on by fundamental improvement.

In fact, analysts refer to it all the time when they write that a stock’s “multiple will expand.” That means the market will apply a higher p/e in the future, which only happens when people are excited and filled with hope about a stock, and are therefore willing to pay a higher price per dollar of earnings than they were before the excitement. Instead of, say, 20 times earnings, they’ll pay 30. That’s the rising multiple.

The best of all worlds is when the excitement about the company is caused by already increasing earnings. Then you have the “e” part of the p/e climbing as the multiple against that “e’ also climbs, producing a runaway momentum stock with a giant “p” that you can cash and take to the bank.

It’s not good to get in front of that kind of momentum, and Apple has had it for some time. That’s why I’m watching to see if a good opportunity to short presents itself. Shorting is riskier than buying and I’m usually content to just wait for a correction to produce a better buy price rather than trying to profit off the decline itself, but every once in a while I make money both ways. I might — notice, might — be able to do so with Apple, but not yet.

Now, back to PCs vs. Macs.

IT specialist Dale Stamps rebuffed my comments that I don’t like having to maintain my PC as much as I need to, and would prefer the Mac’s simpler no-hassle system with this comment yesterday:

“Based on my experience with my customer who is a very loyal Mac user, all individuals need to maintain their computer. I am not in his office all that much, but I have been there when his computer freezes, and he has a Mac expert there to locate glitches in his computer operation, and he has had at least one total disk failure that cost him all his data. He never recovered some of it because it was not properly backed up.”

On the other hand, Omer Ganai hasn’t experienced the Mac troubles that Dale’s customer has had:

I am a very experienced Windows user, having custom built my own PCs for ten years now. I have maintained Windows 98, WinME (ugh), and WinXP installations. While Windows XP is by far the best consumer operating system Microsoft has made, it does require semi-regular maintenance on the part of the user to keep it running well, especially if we are talking about an installation that is over 18 months old. I do most of the same housekeeping that Dale does and, in my opinion, it is unnecessary busywork that should not be mandatory to keep an operating system running well in the long run.

I bought my first Mac in 2002 when I started editing my portfolio reels and publishing them on DVD, courtesy of Final Cut Pro and DVD Studio Pro. I had never owned a Mac before but OS 10.2 and the strength and affordability of those applications convinced me that it was worth it. I liked it so much that I bought my first Powerbook the following year. I kept building PCs every two years to feed my PC gaming habit.

As it stands, the ancient G4 dual 1ghz desktop I bought in September 2002 runs at least as well as the day that I bought it with absolutely zero maintenance on my part. No routine maintenance, no formats and OS reinstallations, nothing. I say “at least as well as” because with each OS upgrade my system actually became slightly snappier than it was before. So I can probably say that after five years with no maintenance, no reformats/reinstalls, nothing like that, that it actually runs better than the day I bought it.

I have never kept a computer as long as I have that G4. Going on five years is unheard of for me. My only complaint with this old system is that MPEG renders are very slow compared to current machines. It still runs Final Cut Studio great. Come October I will replace it with a new desktop that will hopefully last me at least another four years.

I can’t imagine trying to do anything with a PC from 2002 that has had Windows XP installed on it with no reinstallation. Remember that most computer users are not very savvy at all, so throw lack of maintenance into the mix and it would be unbearable.

In my experience, OS X is second to none as far as long-term stability goes. No registry, no dlls, no hidden files, nothing like that spread all over the system to get things bogged down. The underlying structure is UNIX, nice and tidy. You can get deep into the guts of the OS if you would like, just open up a terminal window and go. For most consumers out there, it is a situation where they get a great interface thrown on top of a bulletproof foundation.

If PC gaming weren’t a hobby of mine then I would completely dump Windows at this point.

That is my own experience over the last 15 years with Windows, six with WinXP, and five with OS X.

That’s what I suspected and what I wrote earlier in this discussion. The common wisdom that Macs are just easier appears to be common for a reason. We can also conclude now that if you’re stuck in the PC world for a while longer, make sure you’re running Windows XP. It’s the most stable choice, even though it still needs maintenance.

This weekend: Kelly Letter subscribers will receive their week-in-review note focusing on the semiconductor sector, and our mounting profits therein.

Monday: The pay-per-click ad situation for small businesses, a question about Japan, and thoughts on Michael Moore’s new film SiCKO (not enough room today).

Friday the 13th is not known for good luck, so I shouldn’t be too surprised to find myself sitting directly in the path of Typhoon Man-Yi. All loose outdoor objects are safely stowed, and emergency rations are in place, so the odds favor survival!

I hope you enjoy a typhoon-free weekend in your corner of the planet.

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