Rule One Investing Blog

Did you get caught with the plummet in Apple Computer Inc. (AAPL) stock yesterday? January 23rd, 2008. The stock opened over $20 down from the previous day. During times it was at a 17% decrease from the high from the day before! The stock rallied at the end of the day for a 10% loss. So the question is what happened? Well, nothing really…. and that’s the great thing about yesterday. The way I see it, it’s just Mr. Market being irrational to yesterday’s news and adjusting the price.

Let’s discuss some numbers first.

If you crunch the numbers and calculate the value of the AAPL stock or the sticker price. You’ll be happy to know that currently it’s undervalued. Apple has had an equity growth rate of over 25% for the past 5 years and an earnings per share growth rate of over 70% for the past 5 years. Calculating a value for the stock (or a margin of safety) is tricky because of such a great growth rate. Can they sustain the same rate?

However, if we calculate using a fairly conservative growth rate of 24%, EPS of $4.55 and PE of 31 (current PE) I get a sticker price of ~$300 with a margin of safety of ~$150. Apple is currently trading at $136, $14 dollars below the margin of safety! Wow, seems likes it’s now on sale.  Hmmm, let’s look at this in a bit more depth.

Meaning – Check (I own 3 iPod nano’s and a MacBook 2.0GHz Intel Core 2 Duo – White)

Moat – Check (Who doesn’t want an IPOD over some other MP3 Player?)

Margin of Safety – Check

Management – Steve Jobs is the definition of a Rule One Management running the company as if it’s his only asset.

Would I be happy to own this business and have it as my only asset? YES! (who wouldn’t?)

This is definitely a Rule #1 company. However, just because it’s a rule one company doesn’t mean you should always own the stock.

Did you get out when the technical indicators told you to get out?

Looking at the chart below we can see that there is a large drop on January 3rd to 4th. This is the time when all three indicators (MACD, Simple Moving Average and Slow Stochastic) all cross downwards: the exit point. If you exited on January 4th you would have sold at $180 per share. Between January 4th – 23rd the stock has dropped down to $135. You would have saved yourself $55 per share.

Now what? Well, it’s on the watch list and we wait till the technical indicators tell us to get in (or back in).   In the meantime we keep growing our watch list.