More iPhone Input

Yesterday’s article on the iPhone and AAPL brought a lot of feedback. I’ve collected the best of the bunch.

David Van Knapp at Sensible Stock Investing in Dallas wrote from his summer home in Canandaigua, New York:

I thought your analysis of Apple’s iPhone was insightful. However, some of the “cons” you listed may be eliminated or turned into pluses over time.

As to Apple’s stock, I see it as what I call a “Momentum” (or Type M) stock…overvalued, but with a clear upward price trend.

I like to invest occasionally in Type M stocks. And I do consider this investing, not trading…I will hold such a stock for a long time if it continues its generally upward price movement without dropping too much. I bought Apple in May as a replacement for another Type M stock, CME (Chicago Mercantile Exchange), which I owned for almost two years with tremendous results. (CME’s run ended when it got mixed up in a confusing m&a; situation regarding CBOT.)

For a good Type M stock, I require a very good underlying company (that’s one thing that separates this approach from what traders do), a company I would consider buying if the valuation were better. Since the over-valuation disqualifies the stock from “ordinary” purchase, I will consider it as a Type M purchase. The only requirement (beyond being an excellent company) is a clear, fairly long upward price trend.

My purchase of Apple has worked out great so far, up about 25% in 8 weeks. I protect myself on the downside with a trailing sell-stop. In this case, I am using 10%, and updating it daily since Apple has the potential to be very volatile.

Short Apple? Not now. I don’t short stocks anyway, but even if I did, I don’t think I would short Apple while it is still riding such an upward trend. Because I think it’s overvalued, I expect a time will come when shorting it might be a good idea, but now is not that time.

Dave raises a good point here. I write often on the site that I’m watching a stock or keeping an eye on a stock, and that’s precisely what I mean. Watching is a huge part of the investment business.

However, when I say that I’m watching, people see the reason I’m watching and for some reason think I’ve already taken the action. In this case, I agree with Dave that now is not the time to short Apple, but there will be such a time down the road. I think disappointing iPhone sales will contribute to the stock price getting cheaper, but not yet.

Don from Phoenix wrote:

Never underestimate Steve Jobs. He is the best guru of the bay area, and since you spent time there you know what I mean. Yes, there will be problems and they will be fixed. The ATT issues are real and might be their biggest problem.

As for shorting, wait for signs it is turning over and if it corrects 5-15% it would be a “buy” again. I think AAPL will be around $150 plus, however it will not be a linear path.

Note: I have owned AAPL but do not now since it is too rich for me when there are better plays.

I don’t underestimate Steve Jobs, and it didn’t take living in the Bay Area to feel that way.

Back when Mr. Jobs was running Next Computer and a little known animation company called Pixar — and different management was running Apple into the ground — I read a great interview with him somewhere. What I liked about that interview was that it wasn’t about technology or computers, it was about his views on life. The tone of the interviewer was that Mr. Jobs was a has-been, and it would be interesting to see what a has-been from the computer business was up to.

Instead of talking about Next and Pixar, both of which would have been wonderful business subjects, Mr. Jobs talked about his quest with his wife for the perfect washing machine. He said that one day he was noticing how damaged his clothes became in American washing machines, and wondered if clothes in other countries sustained as much damage. He and his wife traveled around the world and finally found a washing machine in Europe that didn’t beat the clothes clean, but gently swished them in a way that got them as clean as the rough American washer and with almost no damage.

“There’s a better way to do almost everything,” he said in the interview. “That’s how I see the world.”

I set the publication down on the plane, looked out the window, and thought, “I really like this guy.”

That was before he returned to Apple, before there was an iPod, and before the iPhone. So, believe me, I respect, admire, and do not underestimate Steve Jobs.

That written, I also know how the stock market works. Extreme expectations in either direction frequently produce an opportunity to bet that those expectations won’t be met. It’s the market’s application of the old saw, “Nothing is ever as good or as bad as you hear.”

I think the iPhone is amazing despite its initial flaws. I also agree with Dave above that those flaws will be fixed in time. I think Apple has another winner on its hands. However, I think the sales expectations given the flaws are too high and that disappointment when those expectations are not met will pressure the stock lower at some point.

Note that none of this has anything to do with Steve Jobs. He didn’t set the analyst forecasts. He just steered the design of another incredible product.

Jeff in New York asked:

Assuming your assessment is right, would you say it is logical to assume we can expect at least a short-term favorable position for the iPhone competitors like Research In Motion Ltd (RIMM), makers of the blackberry?

Well, RIMM has been on a tear for so long that I don’t think it needed the iPhone as a boost. RIMM is up 238% since last August, and up 64% since the beginning of May.

I’m watching RIMM as a possible short, too, as I have been since January. Good thing I watched instead of acted. As mentioned above and as my subscribers know well, I watch a lot and for a long time, usually, and it most often pays off.

Send me your thoughts any time. Have a great Friday and a wonderful weekend.

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