Tuesday, February 14, 2012


Last October, just after Steve Jobs died, I went to go hear Ben Reitzes of Barclays Capital talk about the Information Technology (IT) Hardware stocks.

Ben is a very good analyst, and his thoughts have always been useful to me in helping me find attractive technology stocks.  But his remarks that day were very different than most analyst comments, and proved to be remarkably prescient.

Ben's favorite stock pick in his group has been Apple.  In fact, Apple has been his number 1 pick for at least the last two years, if not longer.

"The problem you are facing," Ben said, gesturing to the assembled group of portfolio managers, "is that you cannot own enough Apple stock."

"Apple controls the entire IT space.  They dominate in music and tablets. Demand for the iPhone remains robust, despite threats from Google," Ben continued. "You  should have at least 5% to 10% of your portfolio invested in Apple stock, but you probably won't simply because of diversification requirements."

"But I'm telling you:  Apple is truly the only IT stock to own."

Most of us took issue with Ben's comments.  After all, the loss of Steve Jobs would be devastating to Apple - look what happened to Disney stock after Walt Disney died. And the sheer size of Apple - at that time nearly $400 billion - would surely begin to retard its growth rate?

Ben was undeterred.

Apple was big, but its prospects were ridiculously good.  A host of new products - including a foray into television - were coming up in the next year that would give Apple another leg higher.

Moreover, Apple was trading only 12x 2012 estimated earnings, which was a discount to the overall market (as it still is today).

Since that October meeting, Apple has soared +27%.

In the fourth quarter alone, Apple earned nearly $18 billion in free cash flow, and its cash hoard now stands at nearly $100 billion.

And yesterday, Apple stock traded briefly above $500.  With a market cap of $467 billion, Apple is now the most valuable company on the planet.

There will be a time to sell Apple stock, as there is with all stocks.  The products it makes - electronic equipment - are constantly being challenged by strong and innovative companies. There are doubtlessly new and innovative small companies that today are developing products that will someday challenge Apple's dominance.

Ben Reitzes put out a research piece this morning telling clients that Apple can still grow further.  He cites a new iPad that is scheduled to come out in the spring, as well as iPhone 5.  There are new Macs coming out, including a new MacBook.

Oh, and if Apple decides to use some of its cash to pay a dividend - which seems fairly logical, in my opinion - the stock could become even more attractive.

My natural instinct is to worry about companies like Apple, whose fame and following has become so strong.  But for now I think I should just listen to Ben, and enjoy the ride.