LONDON -- I made a double exception when I invested into Apple Inc. (NASDAQ:AAPL) last week.
I generally avoid investing in technology stocks. The fickle nature of consumer demand for the latest gadgets -- with much of it coming from people less than half my age -- makes it hard to pick winners from losers. And winners can quickly become losers: BlackBerry, Nokia (NYSE:NOK), Palm, Psion to name just a few.
I also rarely invest directly in U.S. stocks. The process is straightforward but they're just that bit more complicated to analyze and keep track of.
What were the compelling reasons to make me break my normal rules?
1. Valuation OK, so this is putting the cart before the horse. Price alone is never a good reason to buy a stock. "Better to buy a great company at a fair price than a fair company at a great price," to quote superinvestor Warren Buffett.
But Apple's recent well-publicized share price decline provides a good entry point. The stock dropped 10% after quarterly results revealed "only" 18% revenue growth and margins slightly below expectations, pulling the price down by more than a third from its September high.
It's now trading on a price-to-earnings ratio of 10, barely more than half the S&P 500 average of 19. Strip out its vast $140 billion cash mountain and the P/E is more like 7.
2. Market position Apple Inc. (NASDAQ:AAPL) has a great market position in a growth industry. Though saturation must come eventually to developed markets, there's huge untapped demand in emerging markets. Technology research firm Gartner expects the smartphone market to double from 2011 to 2014.
Bears fear cheaper local products will cannibalize sales in the Chinese and Indian markets. But the big Apple is an iconic Western brand, and I think the success of prestigious fashion brands like Burberry is a better pointer to how things will play in China.
Apple Inc. (NASDAQ:AAPL)'s distinctive approach of synthesizing hardware and software to make an easy and rewarding user experience has bought it a loyal fan base. And there's some stickiness from locking users into services such as iTunes and iCloud.
3. Innovation Apple's excitement has always come from its ability to break the mold and reinvent the market place. That kind of thinking is embedded in the DNA of the company -- surviving inspirational CEO Steve Jobs, and protected by the legacy products that deliver abundant cash flow.
Apple Inc. (NASDAQ:AAPL) fans predict that the company's next target will be the household TV. Tech ignoramuses like me just see a speculative upside in the possibility that the company may yet again disrupt existing providers' technology -- while being aware of the risk its own business gets disrupted by an upstart innovator.