Apple - Final Thoughts
The Difference Between Growth Investing and Value Investing
10 Stocks to Hold Forever - Part Six
Last week, the day after Apple stock (
) cratered thanks to a disappointing earnings report, we sent an
email that included the phrase "We Told You So!"
Was that a bit too much attitude? Perhaps.
After all, no one likes a wise guy.
But I wrote that line, and in the interest of taking full
responsibility for it, I want to explain more fully what I was
trying to communicate.
The first point was that we (mainly me) had been writing for
quite some time about Apple's extreme popularity and the fact that
the stock was ripe for a major downtrend when sentiment began to
To see those writings, look at my
Cabot Wealth Advisories
April 19, 2012
December 3, 2012
January 21, 2013
. Also see Mike Cintolo's column from
January 17, 2013
In all those writings I was trying to educate readers about the
fact that Apple's extreme popularity was actually a huge risk
factor, because when the last buyer of a stock has bought, and
there are no more potential buyers, it takes only the slightest
whiff of bad news to kick off a long downtrend. I saw it happen in
IBM decades ago. I saw it happen in Microsoft. And now I'm watching
the beginning of the process in Apple.
As time goes by, I believe the lesson will become clearer to
The second point of that article was that if you hadn't heeded
my earlier writings, and found yourself holding AAPL on the morning
it cratered, then you should consider a full subscription to our
flagship advisory, Cabot Market Letter, so you can get more regular
advice and education on the tricky business of investing in growth
Some readers, happily, took the opportunity to sign up.
But others were irate at what they perceived as hypocrisy.
Specifically, they were peeved that our value investing letter
(Cabot Benjamin Graham Value Letter) had been recommending buying
Apple right up until that morning!
That is true, but it's not the whole truth.
To see the whole truth, you've got to remember that the goal in
investing is not to be right; the goal is to make money.
Growth investors make money by holding a moderately diversified
portfolio of stocks with improving fundamentals and strong charts,
and by selling when those charts deteriorate.
Value investors make money by holding a heavily diversified
portfolio of stocks that are undervalued at the time of purchase
and holding those stocks patiently until they reach their full
value (which can happen through either price appreciation or
fundamental deterioration or both).
So the full story with Apple is that editor Roy Ward had been
bullish on Apple, on a valuation basis, since February 2011, when
the stock was trading at 348. He only turned bearish last week when
the fundamentals deteriorated. So, subscribers who bought anytime
in the year after his first recommendation were able to make a nice
profit when Roy recommended selling. In fact, Roy wrote, "AAPL has
advanced 47.6% during the past 23.5 months while the Standard &
Poor's 500 Index has increased only 14.0%."
Those who bought in the second year of his bullishness didn't do
so well, however. At the very worst, a person could have lost
So was Roy wrong? Well, you could conclude that after he was
right, he was wrong, but that's not the point. Remember, the goal
is not to be right or wrong, the goal is to make money.
For any true value investor, the AAPL position should have been
one part of one of a well-diversified portfolio. Roy recommends
several of these portfolios in Cabot Benjamin Graham Value Letter,
and in these portfolios, Roy is doing just fine.
Over the past decade, his Classic Value Model has gained 176%
while the Dow is up just 57.1%.
Similarly, over the same decade, his Modern Value Model has
gained 111.6% while the S&P 500 is up 61.5%.
I think that's pretty good.
But back on the growth side, savvy investors stopped looking at
Apple long ago, mainly because it was so big and so popular!
Today, they're working to find "the next Apple," because that's
where the real growth potential lies.
You'll find one contender below.
In recent weeks, I've been writing a series called "
Ten Stocks to Hold Forever
," featuring ten stocks, selected by Cabot editors, that you might
choose to, well, "hold forever."
The sixth stock is
, and it was selected by Mike Cintolo, editor of both
Cabot Market Letter
Cabot Top Ten Trader.
Mike added LNKD to the Model Portfolio of Cabot Market Letter in
June at 103. Today, it's trading at 126, so it's heading in the
right direction. Interestingly, Mike has never done a big write-up
on the company, but I have.
In fact, I liked the stock's potential so much that I made it my
December Stock of the Month, and on November 27 of last year, I
wrote the following.
LinkedIn Corporation (
"Long ago, if you were looking for a job, you looked in the
newspaper. Then in the late 1990s, Monster.com burst on the scene,
using the Internet to connect workers with jobs far more
efficiently than any paper-based medium. It was a great stock-for a
while. But Monster Worldwide (
) is hitting all-time lows today, because LinkedIn is eating
"The reason: while Monster focused mainly on jobs, LinkedIn
focuses mainly on the people in a professional network, and on
giving them the tools and connections that enable them to do their
jobs better. As a result, LinkedIn, which was launched in 2003, is
now the largest professional network in the world, with more than
187 million members.
"Like many networks, LinkedIn is free for any professional to
join; in fact every addition of a new individual makes the network
more valuable, so LinkedIn encourages this. But the real money for
the company comes from users who pay for extras. The number one
extra is "Talent Solutions," which accounts for roughly 55% of the
company's revenues and is used by companies large and small. Cabot
has used the service several times to hire high-quality
professionals, both local and remote. Big companies, including 85
of the Fortune 100 companies and many professional recruiters, buy
"seats" that cost $8,000 per year. Number two is "Marketing
Solutions." As on Facebook, these are basically ads targeted to
users. And number three is Premium subscriptions, which give users
more tools and connections to do their jobs better.
"All three of these revenue generators are growing fast.
Revenues from Talent Solutions were up 95% in the third quarter vs.
a year ago, revenues from Marketing Solutions were up 60% and
revenues from Premium Subscriptions were up 74%. The result was
third quarter revenue growth of 81%, which is a very big factor in
the stock's selection as Stock of the Month.
"Other facts: LinkedIn is available in nineteen languages, and
63% of members are located outside U.S. so this is a truly global
company. Now, the stock will be viewed as expensive by some
investors, with a market capitalization that's roughly 10 times
trailing 12-month revenues. But we never let valuation stop us from
investing in great growth stocks. If you do, you'll miss some great
"And that brings us to one of the biggest reasons for
recommending LinkedIn today. As Cabot Market Letter editor Mike
Cintolo wrote in June, "
among liquid stocks (more than $50 million in daily trading
volume), there are only 12 that have enjoyed triple-digit revenue
growth during the past two quarters, and only 12 that have earnings
growth projections as high as LinkedIn (up 94% this year, up
another 79% in 2013-both numbers probably conservative). And
LinkedIn is the only stock that combines the two! Yes, the
valuation is high, but the stock is truly unique merchandise for
institutional investors; if the market strengthens, institutions
could swarm here.
"Finally, we get to the chart. LNKD came public in May of 2011
at 45, and peaked that week at 123. (That's the opposite of
Facebook's behavior, which is not to say that Facebook is a bad
company, but that the company was too famous and too well-regarded
when it came public). And in the 18 months since, LNKD has never
been able to break cleanly above that 123 level-even while growth
metrics have been stratospheric! In recent months, however, the
stock has begin to tighten up, which tells us those institutions
are slowly accumulating shares, working to acquire their positions
before the eventual breakout. We recommend that you do the
Back in the present, LNKD broke out above resistance at 125 this
morning and may finally be on its way. If you want, you can buy now
and try to hold forever. It could be the next Apple!
Most people, however, would do better heeding the somewhat
shorter-term advice given by either Mike in
Cabot Market Letter
or me in
Cabot Stock of the Month
Yours in pursuit of wisdom and wealth,
Cabot Stock of the Month
Apple: Buy, Hold or Sell?
New Year's Resolutions
Stocks to Hold Forever
Investing in Microcars
The Miracle of Compound Growth
To follow future recommendations of the Stocks to
Hold Forever, sign up free for the
Cabot Wealth Advisory here.