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Subject:  Some thoughts on Apple Date:  2/5/2013  5:14 PM
Author:  TMFGebinr Number:  876 of 1280

Hi everyone,

As you know, the MUE port (along with a lot of other people) owns a few shares of Apple. Six, to be precise. :-)

Date Basis # Gain vs. S&P 500
6/21/11 $328.62 1 sh 34.60% 15.16%
7/27/11 395.37 1 sh 11.87% ( 6.52%)
8/26/11 371.36 1 sh 19.11% (11.96%)
2/27/12 525.70 1 sh (15.86%) (27.30%)
12/17/12 511.94 2 sh (13.60%) (18.35%)

Total: $441.66 6 sh 0.15%

All data as of last night's close.

At one point, it was one of my better winners overall, but is now, essentially flat.

The question I've been debating with myself and others is whether I should sell, hold, or buy. Actually, I probably won't buy at the moment because I'm already maxed out on the holding size I'm letting myself have in the MUE port at 6.5% of total investable funds. Maybe I could squeeze in one more share (which would bring it up to 7.5%). We'll see.

What I'd like to share is some of the thinking I've been doing regarding Apple, arguing this point back and forth. Some of this was part of a recent discussion elsewhere, while some of this is original here. Some of this is from before Apple release earnings a couple of weeks ago, some of it is from after that event.

Let's talk moats.

AAPL -- Not very deep or wide. Android phones can do what iPhones can and Samsung is quite a competitor. Apple may have the market share lead here in the U.S. (something it's supposed to have regained (note the "re" part) recently), but it's way behind worldwide and that's where growth is supposed to come from. iPod sales are in a seemingly permanent decline. And with tablets, Microsoft is making some seriously compelling ads hyping the coolness of the Surface. And then there's all the Kindle flavors, which basically forced Apple to come out with the iPad Mini -- responding rather than leading.

Nokia was the undisputed leader of cellphones until competition caught up and ate its lunch to the point where the survival of the company came into question -- and it had an extremely strong balance sheet at the time, the same argument being made for Apple. If I recall, Nokia was among the last to adopt the flip / clamshell style of cell phone, which replaced the soap bar style from before that. Apple today reminds me of Nokia then.

Everyone seems to be making the argument that Apple shares are cheap, but if that's the case, why the heck doesn't the market recognize that? The market may be inefficient in some instances, but not most of the time (I'm with the camp that it's "mostly" efficient). So, is the market's price accurate? I'm afraid it could very well be.

If sales growth slowed down:
I would suspect that a deceleration of growth from a market-growth-beating level of near 60% to a merely-market-matching level of 30% would not be viewed favorably by the stock market.

Competing on price someday?
I’m worried that "someday" is coming a lot sooner than any of us hope. And I certainly don’t want to see Apple shares do what Microsoft’s have done over the past decade (another company that has and had a very strong balance sheet, paid a dividend, and generated tons of cash flow – just like the Apple of today).

I’m not saying that Apple won’t be a long-term success. I’m just worried that history may be rhyming with this company. (Referring to Twain’s comment, "History does not repeat itself, but it does rhyme.")

<Q1 2013 Earnings released>

Well, with Apple's disappointing results last night, some of my fears are coming to pass.

I had a long conversation with David Meier, another analyst here at TMF, about Apple yesterday before earnings and he and I have pretty much come to the same conclusion. We both see the most likely scenario as the shares staying pretty flat for the next 1 - 3 years, until, at least, Apple can prove to the market that it can indeed innovate again, sell more and more, gain share, and all that. There's a chance that it could move significantly upward if it can do that fairly soon. There's also a chance that it could move significantly downward if the company completely loses it -- if it cannot innovate well enough, if it is perceived to be responding rather than leading (and it has been already with the iPad Mini), if market share drops, if margins contract even