Kass: The Bear Case for Apple
By Doug Kass 09/24/12 - 12:00 PM EDT
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This column originally appeared on Real Money Pro at 8:32 a.m. EDT on Sept. 24.
Pride goeth before a fall -- also publicity, handshakes and celebrity. The biblical injunction about the first and the last trading places often has literal truth. Thus, stocks and bonds, which fared poorly in the inflationary 1970s, excelled in the disinflationary 1980s. The country's most admired companies (as listed annually in the glossy business magazines ) are frequently on their way to becoming among the country's least admired investments. When a cynical investor hears that there are too many optimists in the market, he will begin to worry. By the same token, an over-abundance of pessimists will give him courage. After all, he may ask, if everyone is already bearish, who is left to sell? -- James Grant, Minding Mister Market: Ten Years on Wall Street With Grant's Interest Rate ObserverApple (AAPL) has been a once-in-a-century profit dynamo that has prospered and has expanded its market share by delivering innovative products and expanding its self-sustaining ecosystem. Here is the remarkable chart of Apple's shares since 1985. In the 1960s and 1970s, the stock market was inhabited by the "nifty fifty," a small subset of one-decision stocks that had strong balance sheets, solid franchises (typically leaders in their field), relatively superior profit prospects and were generally credited with the bull market of that era. Some examples of the nifty fifty included Wal-Mart (WMT), Avon Products (AVP), Disney (DIS), McDonald's (MCD), Polaroid and Xerox (XRX). The stocks flourished for a while but ultimately became overvalued and were weighed down by the bear market that continued until 1982. Today there is no more nifty fifty, arguably there is the nifty one -- and that one is Apple. The Wall Street analytical community and many money managers are unambiguously and unanimously optimistic about the company, but let's not lose sight of the fact that the sword is double-edged, as an investor who bought the nifty fifty at the end of 1972 would have had 50% less wealth by year-end 2001 relative to an investor who bought the S&P 500. (Sic transit gloria.) Over the weekend, The New York Times' Joe Nocera wrote an interesting article which speculated that Apple has peaked. It got me thinking, and below I highlight a list of 10 concerns, fully recognizing the current quarter will be ahead of expectations. Apple's significant role in the indices as well as its extraordinary relative and absolute performances have been an important determinant of investment returns. A portfolio heavily weighted to Apple has been a ticket to outperformance. By contrast, a portfolio dismissive of Apple's prospects and underweighted the stock has underperformed. But the above paragraph modifies the past; it does not necessarily hold for the future. Investment history shows that when there is such unanimity of good will bestowed toward a corporation's equity, when the very share price performance of only one security has such a profound impact on aggregate investment returns, when a record amount of analysts (53) follow an individual company with enthusiasm and optimism and when a company's total capitalization is mentioned in the media constantly and throughout the trading day, resonating throughout the investment community, it is time to be on guard if not concerned.