03 Jul The Lato Letter: Volume 1, Issue 20.
It is never easy to say that you are wrong, but there comes a time when reality must be faced and a mistake must be acknowledged. I acknowledged that mistake earlier today by selling my clients’ positions in Research In Motion (RIM).
With perfect hindsight, RIM was the “value trap” of all value traps. Its decline began while earnings were still growing, albeit at a slower rate, but the Price/Earnings (P/E) multiple remained compelling. Starting last April, RIM began a series of negative announcements including the release of an incomplete tablet (the Playbook), earnings misses, senior executive departures, the replacement of the co-CEOs, layoffs and then finally last week a very significant quarterly loss and more importantly the further delay of their new BB10 phone and operating platform.
As the stock reacted negatively to each of these announcements, I maintained the position on the belief that the bad news was factored into the price and the value of the company would resurface with some good news. That was clearly wrong and now with international sales more disappointing than North American sales, losses are expected to continue for at least the next couple of quarters. With the company’s cash position in serious jeopardy of being eroded, I felt that it was best to acknowledge the mistake and realize the loss.
RIM may still be a very viable entity but it is very unlikely that it will attain the market leader status that it once enjoyed and thus realize anything close to the market value it once had. Fortunately, as large as the client losses have been on RIM, the gains on Apple have been several times larger as it continues to flourish.
The obvious question is that if this fall from grace could happen to RIM, can it happen to Apple? The far reaching answer is obviously yes, since if we have learned anything in equity markets over the last few years it is that anything is possible. Practically, however, the situations are very different. Apple is a multi-product company that continues to innovate and improve the features of its current lineup of products, is still seeing very significant earnings growth, enjoys an ecosystem that creates dependence on remaining an Apple customer and continues to address new markets both from a product and geographic perspective.
Like any other stock, Apple does have risks. These risks include product margins that are extremely high and possibly not sustainable as growth slows, muted success of new products (e.g. Apple TV) and an overall global decline in consumer spending that slows the company’s growth. Along with these risks, Apple also has significant opportunities that include the aforementioned Apple TV (or iPanel as some rumours suggest), further penetration of the corporate market as RIM declines, new geographic markets with potential to increase market share and a still very small share of the personal computer market. The opportunities still very much outweigh the risks and with the valuation still extremely low, I continue to believe that Apple has significant upside from these levels and continues to warrant its position as the largest holding in my clients’ portfolios.
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