Apple Stock: For a Healthy Portfolio, Diversify Among a Variety of Fruits & Vegetables

By Aradhana Kejriwal   |   May 2, 2012

Apple (NASDAQ: APPL) is enormous. Just how big is it? Apple is by far the largest company in America. With a market cap of nearly $600 billion, Apple is larger than the entire 2010 GDP of Switzerland. Leuthold Group. Apple stock now comprises more than 4% of the S&P 500, and 18% of the smaller NASDAQ. Apple stock has soared, climbing more than 55% year-to-date in 2012 alone. Wall Street Journal, April 11, 2012. Apple’s growth rate has continued to accelerate. For its first fiscal quarter of 2012, the company reported the highest quarterly revenue and earnings in Apple’s history; Apple reported its net income rose 118% year-over-year, equal to half of net income generated over all of fiscal 2011.

By any measure, these are astounding numbers. Not surprisingly, Apple stock is wildly popular among both professional and individual investors alike. Apple stock is one of the top ten holdings in over 700 equity funds, and it is the single largest holding in over 400 equity funds. Leuthold Group. If you own shares of a large cap mutual fund or an index fund, chances are you already own (perhaps indirectly) shares in Apple.

Given Apple’s incredible performance data, no doubt many investors believe the surest way to quick riches is to buy nothing but Apple stock. But for those who have a substantial stake in Apple stock or who might be considering making a substantial investment in Apple, there are a number of questions they might want to ask:

  • Is Apple fairly priced at $609 per share (Yahoo Finance, 4/17/12) or has Apple become today’s most overbought stock?
  • Can Apple keep growing its revenue at 40, 50, or even 70 percent in perpetuity?
  • Do Apple’s future revenue prospects warrant paying Apple’s current price-to-earnings (P/E) ratio of 17.82? Yahoo Finance, 4/11/12.
  • What if something happened to Apple that had a significant impact on its production or revenue?

Perhaps the ultimate question is this: Does diversification really matter?

Before we go any further, we remind readers that the discussion herein is intended solely for educational and entertainment purposes; it is not intended to be and should not be considered as or relied upon as an individualized recommendation or personalized investment or financial advice. With these disclosures in mind, let’s continue our discussion.

But what about some of the great companies that were once the darlings of investors in yester years? How did companies like Microsoft, which also made it into the coveted 4% weight in S&P 500, perform after reaching that prestigious mark?

The chart above shows that Microsoft tipped the 4% weighting in January 1999, but did not stay there for long; its stock price peaked a little later and subsequently fell. In fact, since the S&P 500’s inception in 1957, no company has been able to retain its 4% weighting over the long haul. Since 1990, a few other elite stocks rose to the 4% threshold, then saw a drop-off in price, including: General Electric in December 1999 (staying there for about 1 year before losing its position as the stock price fell), Cisco Systems in March 2000 (staying for less than 1 year), and Exxon Mobil in April 2008 (staying for less than 1 year). Source: Leuthold Group. Will Apple follow the same pattern as Microsoft and these other companies or chart a different course?

Investors often assume that the great companies of today will continue to be the great companies of tomorrow. With that rosy future in mind, investors tend buy more and more stock in such companies, a behavior often fueled by powerful emotions. We think Warren Buffett’s wisdom, “Be fearful when others are greedy and greedy when others are fearful,” applies here. If Apple appears to be the best stock that everyone should buy and is buying now, then perhaps it is time to consider the risks and evaluate a contrary position as well.

While one could argue endlessly about investment merits of Apple’s stock, one simple investment concept still holds true. Investing in only one stock likely will prove harmful for your portfolio in the long run. GV Financial Advisors is a firm believer in the power and purpose of diversification – at a portfolio level, at a asset class level and at a fund level. The purpose of diversification is to reduce investment risk by avoiding concentrating in ANY one stock, one company, one asset class, or even one country.

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