The Power of Fear
A High-Potential Growth Stock
Apple, a Long-Term Perspective
Fear has always been a powerful motivator, and I was reminded of this last week during a visit to Munich, where I viewed some wonderful early European art in the Alte Pinakothek museum.
The one below is by Hieronymus Bosch (1450-1516), a Flemish artist known for his use of fantastic imagery. Titled “The Last Judgment,” it was intended to scare people into being good, so they’d avoid being sent to Hell.
Here’s a detail.
Another painting with a similar goal was “Fall of the Damned,” by Peter Paul Rubens (1577-1640). The original is quite large (88” x 113”), and the detail is spectacular.
Admittedly, these are fantastic pictures, in the original sense of the word. Today, most of us know better than to fear a future of this nature. But given the lack of scientific evidence to the contrary, it’s no surprise that people back then were persuaded to heed the message, or at least to consider the consequences of ignoring the teachings of the church.
Which brings me to the modern world, and the fear messages that today’s media present to us.
Most egregious, in my mind, are the sales pitches that scream about the collapsing dollar, the coming hyperinflation, the impending takeover by the Chinese, etc. and then go on to tell you how to invest to protect yourself from sure financial Armageddon.
That these fear-based sales pitches work is clear; that’s why their creators keep running them. The reason they work is clear, too. Given that the vast majority of us are no more able to see the future than 16th century Europeans could see beyond their own death, we are all too easily persuaded to fear the worst when it’s presented in a slick package.
But unlike our predecessors, we do have evidence that these dire scenarios are unlikely to come to pass.
First, we have the simple fact that all previous predictions of economic devastation promised by fear-mongers in recent centuries have not come to pass. Do we think we’re so special that this time these predictions will come true?
Second, we have the knowledge that as humans we are infinitely resourceful and creative, and that when sufficiently motivated, we can find solutions—technical, economic, social and legal—to just about any problem that arises.
Admittedly, when you’ve spent your whole life working to achieve financial success and a comfortable retirement, the fear of losing it can be a powerful motivator. At some level, burying coffee cans full of gold coins in the back yard feels good, just as it does to have a pantry full of your favorite comfort foods.
But I’d rather bet on the future, and the ability of men and women of reason to devise solutions.
Consider the situation in Congress just last week.
With the national checkbook running dry, untold hours of airtime and untold column inches (someday no one will know what that means) of print media were devoted to exploring what would happen if the U.S. Government shut down.
Will Rogers was kidding, of course, when he claimed that he only knew what the newspapers told him. But we still find his joke funny, because it’s an ironic commentary on how most people still take the overheated pronouncements of the media as gospel.
The fact is, despite all the handwringing from so-called pundits, the government didn’t shutdown, because when the deadline was reached men and women of reason found a solution. (As a publisher, I know the value of deadlines.)
And I’m betting that men and women of reason will keep finding solutions for centuries to come.
So, when confronted with fear-mongering messages of economic trouble, you can throw your lot in with the doomsayers, buy property in a remote location, build a moat, live a life of fear, and limit your opportunities for growth … or you can stick with me on the road to the prosperous future as it will be developed by creative motivated people.
And the best part of that road is this … you and I don’t need to know the details of that future, all we need to do is follow the time-tested methods that have served Cabot investors for decades.
One of these methods involves watching for stocks with uptrending charts and then investigating to see which of the companies behind the stocks have revolutionary growth prospects.
On the day I saw these paintings in Munich, I also visited three other museums, the Glyptothek, the Staatliche Antikensammlungen and the BMW Museum.
It was a great day, but at the end of it, my feet were tired.
So, looking for a good restaurant close to my hotel, I turned to a company I’ve mentioned here before, a company that’s been making my restaurant experiences better since I joined—for free—in 2005.
It’s OpenTable (OPEN), the company that allows you to make free restaurant reservations over the Internet at more than 20,000 dining establishments in the U.S. as well as in Canada, Germany, Japan, Mexico and the United Kingdom.
The company began operations in San Francisco in 1998 and has grown every year since. In the latest quarter, revenues grew 61% to $30.8 million, while earnings jumped 114% to $0.30 per share. And OpenTable has a great business model, with very little inventory. So even though it’s investing in growth, profit margins are still expanding rapidly. In the latest quarter, it hit a record 23.9%.
As to competition, it’s inconsequential. Can you say monopoly?
I first mentioned the stock here last July, when I was trading near 43. Today it’s trading at 109, which no doubt will make some readers say, “It’s come too fast! It’s too high.” Well those are typical complaints about the best growth stocks, but I’d rather own growth stocks than stocks going nowhere.
Here’s what I suggest. Wait for a decent pullback in OPEN, perhaps down toward support at 95. Or better yet, take a very reasonably priced subscription to Cabot Stock of the Month, so that you can get my advice on OpenTable—as well as many other high-potential stocks—every week.
Note: For the record, my colleague and I ate at Lenbach, on Ottostrasse, which was attractive not just for its location but for its embrace of “eclectic” cuisine, rather than the traditional meat and potatoes and cheese and beer that I’d had been enjoying for several days. For me, heaven was sushi and sashimi and a nice Italian wine.
Last week brought the news that when the market closes on April 29, Apple’s (AAPL) weighting in the Nasdaq 100 will be cut from 20.5% to 12.3%.
The reason? The stock has been too successful, and the “extra boost” that it was given as a small stock when the index was last adjusted in 1998 now makes the stock’s impact on the index excessive.
Other successful growth stocks will see their weightings reduced as well.
At the same time, the weightings of the titans of a decade ago, Microsoft (MSFT), Oracle (ORCL) and Intel (INTC) will be increased, in part because these stocks haven’t kept pace with AAPL.
The short-term implication is that institutions and indexes that seek to simply replicate the performance of the index will need to sell some of their APPL and buy more MSFT, ORCL and INTC.
But what does it mean in the long-term?
The only other special rebalancing of the Nasdaq 100 came in 1998, just before the top of the tech bubble. In that rebalancing, Microsoft, which had briefly topped a 25% weighting, was the target of the biggest cut.
And what’s happened since?
MSFT stock is lower today than it was back then, even though Microsoft’s revenues and earnings have both grown more than four-fold.
Now, I’m not predicting that AAPL will suffer the same fate. History may rhyme, but it doesn’t necessarily repeat.
Nevertheless, it’s important to be aware of all the factors that influence stocks’ moves, and in the case of leading stocks in particular, you’d be remiss not to consider the role of public sentiment.
In this case, Apple is a very highly regarded company, whose products are increasingly loved by people all over the world. And that’s great for business, but it also means that you should be aware that Apple may be close to the point of peak perception, just as Microsoft was 13 years ago.
For the record, I’ve been an Apple user since 1987. I’ve bought more Apple computers than I can count, for both business and home use, and today I’m a regular user of MacBook Pro laptop, an iPad and an iPhone. They’re all fabulous products, and I think the company has a great future.
But I know better than to confuse the company with the stock. They’re two different animals, as Microsoft has demonstrated so clearly over the past 13 years.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
P.S. Subscribers to Cabot Top Ten Weekly recently nabbed 36% profits in AAPL! To learn more about other leading stocks recommended by growth stock expert Michael Cintolo, click here. Ten new trades are available online now and every Monday. Don’t miss them!