BENJ GALLANDER and BEN STADELMANN
Want to invest in a relatively simple, stable business? Think Exxon (XOM-NYSE). People buy cars, drive cars, fill cars. While the composition of gasoline does change a tad, how many consumers really note the difference? Not a high percentage. What the end user does discern is when the price at the pump changes. That can indeed impact the consumption pattern. But only mildly. Instead of buying on Monday when prices are high, they'll wait until Wednesday, when a couple of pennies a litre are shaved from the price. Or vice versa. In the end, the purchases are virtually a wash, with the difference in margins nominal.
Feel like making your investing more challenging? Take a ride on the technology train where companies must continually reinvent themselves by creating relevant products that patrons love. That is no easy feat and a primary reason that Apple (AAPL —Nasdaq) has such a hard row to hoe, even though less than a year ago, this was the go to choice.
Remember? The stock price soared from under $120 in May 2009 to above $700 in September of last year and many prognosticators surmised that $1,000 was a short dash away. Oopsie. Since then the stock price has been slashed by about 45 percent, even though US markets have done pretty well overall. While many analysts conjecture that this is simply a regathering period before a further flight upwards, there are numerous reasons to bet against this company reaching those upper price points in the foreseeable future. Or perhaps ever.
The first is that the corporate founder and leader, Steve Jobs, is now amongst the dearly departed. There is no question that his genius was critical to the company regularly scoring new products that the public coveted and that he was involved in the marketing campaigns that made loving Apple as wholesome as mothers suggesting that their infants eat the fruity product.
With Mr. Jobs gone, the reins were passed to Tim Cook. The jury is still out on how successful he will be. But it is clear from this vantage point that he was granted way too much compensation with his first grab of $376 million in 2011, though he has to stay with the company for a decade for it to vest. Double darn, we forgot $180,000, more than most people see in a few years, but a pittance for lads like him.
Another major mistake was the bond issue to do a share buyback and proffer dividends. Taking on debt for those two purposes always seems silly to us, even if interest rates are at or near historically low levels. In addition, with $39 billion in the kitty, it makes way more sense to operate within the rich corporate means, rather than taking on debt.
An interesting exercise is to look at many of the largest companies by market capitalization. Outside of Microsoft and IBM, which of course are also in the technology sphere, other leaders include Exxon Mobil, PetroChina, ICBC, Wal-Mart Stores and BHP Billiton. All of these enterprises exist in a world where the products are not changing dramatically.
The technology sphere is littered with companies that were leaders and either died or were badly beaten down. Think of Commodore, Compaq, Myspace, Nokia, Sony and Zynga, just to name a handful. Remember Ampex, Atari, Digital Equipment, Eastman Kodak, Magnavox, Polaroid, Wang and Zenith? Many of these were stellar mainstays, market leaders whose future seemed secure to infinity and beyond.
While shorting Apple is a risky business given the dividends and the potential for share price appreciation if a sexy new product is rumoured or real, buying shares is also highly questionable. This appears to be a good company to watch from the sidelines and to use their merchandise if it works for you.
Yes, creating new products on a regular basis is a very tricky business. At some point, it becomes impossible to stay on top of things and remain technologically relevant. That makes Apple’s future less secure. It is far easier to pour pop down people’s throats or fill their cars with gas. While those sectors too will change, the transition is slow. That helps stabilize profits and secure the future.