April 30, 2006

Apple - trends need catalysts - A CASE STUDY

Apple has almost always been cool, yet for much of it's life, there was no money to be made in the stock despite the boom in stock prices for competitor's like Dell and Microsoft.

It is great if you discover the catalyst, but a catalyst alone will not make you money. The first person to buy an ipod and love it - did not get rich buying the stock immediately. If you bought the day after Steve Job's came back to the company - you did not get rich immediately. In fact, Michael Dell told Steve Job's to liquidate the Company . In Apple's case, universal skepticism from Wall Street, and Corporate America proved to be the biggest catalayst and the one that is the small investor's best friend. That is:

YOU DON'T NEED TO DISCOVER SOMETHING FIRST TO MAKE MONEY IN THE MARKETS. I don't ever expect to be first but I have learned to recognize stock patterns (new high, volume, good market conditions) that work for me that give me greater confidence that catalysts will start to benefit a stock. After that, money management will decide how much money you make.

Apple's 700 percent gain catalysts included:

1. iTunes
2. Retail Stores
3. The OS becoming less important
4. The iPod

Going forward, many catalysts remain which I discussed last week .

The biggest is in Apple hardware and software beyond the iPod. The iPod is now discovered. It will grow, but Wall Street now expects this. Apple can only disappoint here. This is the new risk in an Apple stock that has appreciated so much. To buy today, you must appreciate that or you will suffer losses.

Other catalysts that remain include:

1. iTunes - this may still be the biggest. This weekend I heard a local Ford dealership offering 500 iTunes on a $15,000 car. The possibilities for iTunes are endless as the iPod's distribution grows.
2. Other recurring revenue streams - The .Mac accounts and Video's.
3. Retail expansion - There is a blog that covers Apple's retail store business .
4. The analyst dubbed "halo effect" which says that iPod sales will lead to Mac sales. It is talked about in the blogsphere as Apple chips away at Microsoft. Anything is possible !


HAVE A PLAN

I believe in the remaining catalysts, trumping the screw-ups along the way. Until something really changes, I have a plan to buy extreme weakness in the stock caused by general market conditions and screw-ups in quarterly sales .


WHO ELSE MAY BENEFIT and WHO MAY SUFFER - The LONGTAIL

From Microsoft, Dell and Intel benefitted and Apple suffered.

From Google, all it's competitors suffer in one way or another from the uncertainty it creates in the stock market which leads to multiple compressions for everybody.

In the iPod case - there have been component winners and accessory companies have flourished. The biggest winner so far seems to be Akamai which helps speed up the delivery of songs and video for iTunes.

What I have learned from this one successful investment is that even in the technology world, simple rules can make you money.

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