Brokerage firms across the country are full of accounts that sit neglected. These are not empty accounts that were never closed, but accounts that are full of the securities of a former “hot stock of the day”. Stocks that had made a tremendous run up on analyst and media hype. Stocks that analysts were falling all over themselves to publish the highest target price. Full of stocks that the account owners thought would “be the pride of my account when I retire” or “I will leave a million dollar portfilio to my children when I die because of this stock.” It is sad to hear the tales of people who watched their accounts grow to heights they had never anticipated, only to watch it drop to near worthless when they never sold the stock. It is one thing to be loyal to a companies products, it is something else to be loyal to the hype of a companies stock.
Many of the owners of these accounts were lulled into not selling by a broker who was still getting new clients into the stock and didn’t want to have sellers breaking the momentum, especially sellers at his own firm. But what else kept these people from selling? Was it the fact the stock had dropped at sometime in the past, and recovered? Maybe even recovered to new heights! The way it usually happens, is after the big initial drop, the stock probably went down a few cents a day, with the occasional recovery that gave the shareholder hope it would come back. (Maybe it will get back to the old high, I’ll sell it then,) The older brokers used to sit around and tell fables and stories like “Trading Sardines” and the great Tulip Mania. At the height of the tulip bulb mania in1637, a “prize” tulip bulb in Holland sold for 10 times the annual income of a skilled craftsman. The event was highlighted in a book written by Charles Mackay in 1861 called “Extrodinary Popular Delusions and the Madness of Crowds.” In the book, one bulb was said to have been traded for 12 acres of land. This phenomena is also known as “The Bigger Fool Theory”.
What does all this have to do with Apple stock? Let’s start with the hype, there are at least 46 analysts following Apple, all but two rating it as a buy. Nearly every day one of these guys has published a new higher “Target Price”. A recent example is “J.P. Morgan analyst Mark Moskowitz repeated his overweight rating on Apple (AAPL), added the stock to the firm’s ‘Analyst Focus List,’ and increased his target price on the stock to a Street-high $390.” There are “investment blogs” shouting $500 as a target. Every mutual fund and money manager has it in their portfolio, private investors have fallen all over themselves to buy it. The investment blogs promoting the iPhone and iPad are endless. The stock is again trading at all time highs. To say the stock is ahead of itself would be an understatement. Apple is number two on the list for highest capitalization, with revenues and earning that should have it at 14 or 15. By now the analysts know the stock price is way ahead of its self, and several hedge funds have gotten out of the stock. So the analysts will now less frequently talk about the stock. If asked about the stock, will make neutral comments or off the cuff references to some event that should bring the price up. Eventually their comments will translate into indifference, and they will quietly take it off their buy lists and let it fade into oblivion. Apple now books the two years of ATT royalty payments the day a person signs the ATT contract for an iPhone. This agreement with ATT will end next year, at about the time the market will be awash with competing smart phones. It won’t matter that no one smartphone is competing with the iPhone. The fact is there will be dozens of smartphones on the market all having some special feature that a person looking for a smartphone will want.
Apple has a good market going with their iPad (an expensive Kindle like ereader on steroids), but there are more than 20 competitors coming to market within the next 6 months. By summer of next year, you will be able to walk into a Best Buy and compare the virtues of a mind boggling number of ereaders and tablet computers. Apple stock, at one time traded close to 30 million shares a day, now it is trading 7-9 million on a good day. The signs are all there for the savy trader, it is time to get out. It may still move a little higher, but remember, only one trader gets the all time high price. Don’t become the owner of an account with a portfolio of worthless, once high flyers.