Much of the value of Apple as a company is derived from its ecosystem. If you own an iPhone, you are very likely to use iTunes. You’re also likely to have fallen in love with iOS and taken to the iPad or iPad mini. As David Einhorn has said, Apple Inc. (NASDAQ:AAPL) is a software company that sells its software through product cycles. Thus, the value of the company’s ecosystem, the vehicle through which the software is sold, surpasses the value that each physical product alone provides to shareholders. The other day the company fell below $400 per share, an almost 40% haircut in the last 8 months. It trades at roughly 6x earnings ex-cash, even after taking into account the taxes the cash would go through if moved back to the US, and is cheaper than many of its comparables. At these prices, my wish list reminds me of why I wanted to buy Apple Inc. (NASDAQ:AAPL) before it became cheap, and allows me to take advantage now that the price is right rather than remain fixated by the fear that the stock may fall further in the short-term.
However, you should expand your wish list to as many companies as you can possibly find that you would like to own. Choose companies with high growth potential, visionary management, stable revenue, or any other characteristics you’d look for in your dream company. Your watch list should be full of companies at the top of their industries. I personally like Costco Wholesale Corporation (NASDAQ:COST), which with fantastic management and a solid business model and reputation has managed to grow pretax income from $1.7 billion to $2.7 billion in the last four years. Today, Costco is expensive at 23x earnings. Having been to Costco and filling my pantry in bulk with its cheap yet quality products, I can say this price may be fair. However, if there were a market downturn, I would be confidently buying all the Costco Wholesale Corporation (NASDAQ:COST) stock I could get at 15-17x earnings, knowing how much of a bargain those prices are compared to the prices I was getting just a little while before.
By reducing market exposure by taking short positions or an unconventional long positions and preparing for a downturn by making a watch list of the greatest companies available today, any investor should be ready to take on the trials and tribulations of the markets in the coming years.
The article How To Prepare For The Inevitable Market Mania originally appeared on Fool.com and is written by Nikhil Shamapant.
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