Apple Added to the F Wall Street Portfolio

September 18, 2008 by Joe Ponzio

Yesterday I added Apple to the F Wall Street portfolio to the tune of 10% of our portfolio. I started watching it as it dropped below $160 on September 5th – the low end of my estimation of Apple’s intrinsic value. Let’s take a look at the purchase.

We first looked at Apple on October 23, 2007. At the time, it was trading between $182.76 and $188.60, and I felt it was somewhat overpriced, and that Apple was a $150-$180 per share business in 2007. No matter how exciting Apple’s story was, I couldn’t overpay for the “right” to own Apple’s stock.

(Interestingly enough, pretty much everyone who writes about Apple and doesn’t call for Apple $1,000 by the end of the week/month/year is an idiot in the eyes of the very vocal Apple-lovers around the web.)

At any rate, I didn’t think Apple was a $186 business last year. So, when it topped $200 in December of 2007, I didn’t bother looking at it any more. Appearing 30% or more overpriced relative to the company’s intrinsic value, I put Apple on the back burner and began looking for other opportunities.

Falling From Grace

By February 26, 2008, Apple had fallen to as low as $115.44. This can happen a lot with “exciting” businesses – people buy the stock because they love the products and the price is zooming upwards. Soon, everyone wants to get on the bandwagon. The Yahoo! Finance forums are a great place to go to follow irrational joy and fear. Just look at what the people were saying in November and December of last year.

Then, the price begins to drop and, as it drops, more and more sales come in. Regular people that thought the stock was exciting begin to see their holdings drop – $190…$180…$170.

Oh my gosh. I’m going to lose everything. What was I thinking buying a $200 stock?

By the time Apple had bottomed out, investors that followed the hype and bought at $203 expecting, as one Yahoo! yahoo said, $650 a share by the end of 2008, were down as much as 43%.

Unfortunately, one of the problems of running a website and a business and a life is that I can’t always run to my computer to write a post about what I’m buying or selling. So, F Wall Street missed an opportunity to add Apple to its portfolio.

Keeping an Eye on Apple

Over the next seven months, I kept an eye on Apple, looking for an opportunity to buy under $125 or so. I figure Apple to be a $160 to $180 business in 2008; so, a 25% margin of safety (because it is a larger, more stable company) would put me in somewhere between $120 and $135.

By April of 2008, the price had climbed outside my comfort zone, and I had to wait. For five months, Mr. Market would not play nice. Apple stayed in that $160-$180 range, and I had to ignore it entirely. If things play out perfectly for Apple, buyers at $160 or $180 can stand to make nice returns over the long-term.

But, things don’t always play out perfectly. “Exciting” is not a good enough reason to ditch a margin of safety.

A Dozen Roses for Mr. Market

Yesterday was a different story. As Apple’s price began its September spiral down – opening at $172.40 on September 2, 2008 and dropping as low as $120.68 yesterday – it slowly moved its way up my radar. Yesterday, Mr. Market presented an opportunity to buy, and I put 90 shares into the F Wall Street portfolio – about 10% of the portfolio’s assets – into Apple at $122.50.

The Plan for Apple

I like Apple. I like their products. I like their commercials. But, it won’t qualify as a “permanent” holding in the F Wall Street portfolio. If and when Apple gets back to the fair price range of $160 to $180, I’ll sell and look for another opportunity.

A Note From Joe Ponzio

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