Apple Core Hits Wall Street

The inherent value of any online investment community lies in the ideas generated by the community. Even more important is the performance of those ideas. We here at InvestorPlace Blogs are proud of the market-beating returns our bloggers have posted over the last few months. The top 25 participants in round one of our stock picking competition, Strategy Lab Open, racked up gains ranging from 14.85% to 49.02% during a time in which the markets were virtually unchanged. Strategy Lab Open is the qualifying tournament for the MSN Money Strategy Lab, where top investing pros use competing strategies to see who can make the best return in a six month period.

As an extension of the Lab, Strategy Lab Open aggregates the wisdom of do-it-yourself individual investors in a blog format where users can find great information on many of the most widely held traded stocks available in the market.

Apple's "earth shattering" earnings report and reduced future guidance yesterday prompted me to visit the Open. Given that Apple was one of the most widely held positions during round 1 of the Strategy Lab Open competition, I wanted to view the prevailing wisdom on the stock - that is prior to this market moving announcement.

It was no surprise to me that Apple was a favorite stock of many individual investors. Apple was on my list of top 10 stocks for 2007 and obviously I was not alone in my bullish views on the company.

What does 2008 hold for AAPL? Find out what our bloggers have to say.

How could you not like what Apple was doing? This perennial innovator was hitting on all cylinders. Add in the fact that bull markets tend to end with a blow-off top in momentum stocks, and I was quite sure Apple would do well in 2007.

Sure enough, most of the best performers during the year were in fact momentum growth stocks including Apple. Here are some of your thoughts on the stock during the recent Strategy Lab Open competition:

On October 23, 2007 AverageJeremy had this to say: "Of course, now I'm kicking myself for not getting in on the Apple rocket ship back in August. Even at $140 a share Apple would have been a steal. Since that price point Apple is up around 25%. Currently the Nasdaq is at around a 13% to 14% gain for the year versus an 8% to 9% gain for the Dow Jones and a 6% to 7% gain for the S&P 500. Whether this trend will continue for the next 2 years is anyone's guess but I can see the potential in stocks like Apple over that period."

Well after today's action Apple now trades for below $140 per share. AverageJeremy no longer has to kick himself for missing the Apple Rocket ship. The question is will he want to ride the ship today in light of yesterday's news?

How about this on August 11, 2007 from DuffBeer in response to Ken Kam's question as to why so many people liked Apple: "I have been waiting for a buying opportunity in AAPL for years and all it does is go up. I continue to miss it or the break never comes. All AAPL does is move up in value. While you crunch the numbers, I see AAPL's innovation, leadership, brand recognition, increasing market share and world exposure, product acceptance, ability to overcome set backs and its consistent growth and profitability. That is why I put it in my fund."

I would view DuffBeer's dilemma as common in the world of momentum stocks. They sure are tempting to own given the appreciation, but doing so can be dangerous to your wealth as evidenced by what transpired with Apple today.

Former Strategy Lab amateur, DougB had this to say on September 28, 2007 about Apple: "AAPL on the other hand shouldn't be viewed lightly. In two months, it has climbed over 15% for me. I still like the company's prospects and continue to hold for that target 30% or more."

I'm hopeful DougB took his 30% gain and then got out. Then again, this may be much ado about nothing. DougB may just ride out the storm and get his 30% down the road.

The contrarian viewpoint in the community comes from Ahknaten. On September 20, 2007 Ahknaten wrote: "You like the IPod eh? Cool. Maybe you should buy your IPhone and IPod and love your store and your cool looking AAPL computer, and perhaps you should short the stock as well? Perhaps? I dunno. It's just that it smells like a 'hot stock' right now. The valuations are rich, there is some insider selling, I see it's had some decreasing asset turnovers and high accruals. I notice that I can't seem to justify the valuations and I wonder if they can really keep up with beating analyst estimates by 0.10 to 0.36 cents each month. You do realize that next quarter, if they don't beat by 0.10 cents, then it might look bad, right? Sure, it's a growth story, but can growth really continue so much? Don't you think that other competitors will kick in? Hmm... I see you made a valuation and it looks undervalued, may I ask you... oh dear analyst... what were your terminal ratios in your valuation? Or did you just take the PE and multiply it by the EPS? But wait, you love the momentum. And I would argue that momentum is a factor in the market. But as you like it then is it a good guess to presume that perhaps some funds are bailing out of the stock now? It's just a thought. If you do love the volume and returns, you must certainly not only like AAPL, but do you like RIMM, RIO, JNPR, AMZN, FCX, CROX, VIP, NOV and GMST as well? If not, then why not? Those seem like 'hot' stocks to me. They might even do well for momentum-based trading games. They have nice charts, don't they?" So perhaps I'm a bit cynical and perhaps I'm a contrarian and perhaps I have no idea what I'm talking about. I don't know. But, as I look at this stock a bit more carefully, I seem to see more negative aspects than positive ones and for that reason I cannot in good conscious recommend it as a buy (unless it's for risk/diversity purposes) and for the time being it sure seems like a short to me. But then again, remember to do your own due diligence."

It is interesting to note that Apple did indeed beat estimates by $.16. The problem was in the guidance. With future revenue and earnings less than currently expected, traders used the news to pummel the stock today.

Of course, not everyone agrees with the market's reaction. InvestorPlace's own Louis Navellier weighed in with this pithy and to-the-point entry on his Navellier Growth blog, declaring "Apple always issues cautious guidance and then posts huge surprises. Their Mac sales are simply unbelievable. iPods sales are slowing a bit, but are still firm...Apple is a screaming buy."

What does it all mean? In my opinion, Apple's proven ability to innovate justifies the rich valuation. That being said, Ahknaten said it best by wondering if growth can continue forever.
Only time will tell. I wonder what some of you are thinking today.

Jamie Dlugosch
Executive Editor, InvestorPlaceBlogs

P.S. Want to see how you stack up as a stock picker? Here's your chance! We're taking registrations for round 2 of Strategy Lab Open, and we'd love to have you on board. You could be the next great undiscovered stock guru. Sign up to be a part of Strategy Lab Open today.

by Hillary Mark |  01/23/08  |  Stocks: AAPL,